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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 MARCH 31, 1998
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 March 31, 1998, was 7,759,255.
<PAGE> 2
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, 1997 AND MARCH 31, 1998...............................3
CONSOLIDATED STATEMENTS OF OPERATIONS -
THREE MONTHS ENDED MARCH 31, 1997 AND 1998.........................4
CONSOLIDATED STATEMENTS OF CASH FLOWS -
THREE MONTHS ENDED MARCH 31, 1997 AND 1998.........................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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<PAGE> 3
3
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>
MARCH 31,
DECEMBER 31, 1998
1997 (UNAUDITED)
------------ ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash & Cash Equivalents 12,449 11,002
Accounts Receivable 554 51
Inventory 218 504
Other Current Assets 117 146
------- -------
Total Current Assets 13,338 11,703
PROPERTY & EQUIPMENT, net of accumulated depreciation of $507 and
$593 in 1997 and 1998 respectively 930 911
------- -------
OTHER ASSETS, NET
Other Assets 289 293
Due from related parties 442 449
------- -------
Total Other Assets 731 742
------- -------
TOTAL ASSETS 14,999 13,356
======= =======
LIABILITIES & STOCKHOLDERS (DEFICIT) EQUITY
CURRENT LIABILITIES
Accounts Payable 515 421
Accrued Liabilities 758 853
------- -------
Total Current Liabilities 1,273 1,274
CONVERTIBLE NOTE 250 250
------- -------
REDEEMABLE SUBORDINATE PROMISSORY NOTE 502 792
STOCKHOLDERS' (DEFICIT) EQUITY
Series A conv. preferred stock 0 0
Series B conv. preferred stock 0 0
Series C conv. preferred stock 0 0
Common Stock 8 8
Warrants 0 0
Additional paid-in-capital 25,372 25,376
Deferred compensation (210) (191)
Accumulated deficit (12,148) (14,105)
Notes Rec. from officers (48) (48)
------- -------
Total Stockholders'(deficit)equity 12,974 11,040
------- -------
TOTAL LIABILITIES & EQUITY 14,999 13,356
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
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4
SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
THREE MONTHS (OCTOBER 27,
ENDED MARCH 31, 1992 TO
MARCH 31,
1997 1998 1998)
-------- -------- --------
<S> <C> <C> <C>
REVENUE
Product Sales
Collaborative agreements $ 76 $ 50 $ 2,704
COST OF SALES 0 250 250
-------- -------- --------
GROSS MARGIN 76 (200) 2,454
EXPENSES
Cost of revenues
Research & development 526 1,094 9,033
Sales & marketing 138 235 1,759
General & administrative 709 707 6,181
-------- -------- --------
Total 1,373 2,036 16,973
-------- -------- --------
Operating loss (1,297) (2,236) (14,519)
OTHER EXPENSE (INCOME) 2 (135) 383
INTEREST EXPENSE (INCOME) (50) (144) (797)
-------- -------- --------
NET LOSS $ (1,249) $ (1,957) $(14,105)
======== ======== ========
Net Loss Per Share
Basic (0.84) (0.25)
Diluted (0.84) (0.25)
======== ========
Weighted Common Equivalent Shares
Outstanding
Basic 1,494 7,749
Diluted 1,494 7,749
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
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5
SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED PERIOD FROM INCEPTION
MARCH 31, (OCTOBER 27, 1992)
1997 1998 TO MARCH 31, 1998
-------- -------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ................................................... $ (1,249) (1,957) (14,105)
-------- -------- --------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ......................... 49 97 774
Amortization of debt discount ......................... -- -- 138
Issuance of stock in settlement of dispute ............ 14 14
Amortization of deferred compensation ................. 19 19 113
Changes in assets and liabilities:
Accounts receivable .................................. (1) 503 (51)
Other assets ......................................... (21) (331) (885)
Due from related parties ............................. (7) (7) (449)
Accounts payable ..................................... (158) (94) 421
Accrued liabilities .................................. 336 95 985
Deferred revenue...................................... -- -- --
-------- -------- --------
Total adjustments .................................... 217 282 1,060
Net cash used in operating activities ............. (1,032) (1,675) (13,045)
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment ............. (148) (67) (1,504)
Payment of royalties ....................................
Additions to purchase technology ........................ (7) -- (205)
-------- -------- --------
Net cash used in investing activities ............. (155) (67) (1,709)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock (net of issuance costs) ........ (426) 5 13,904
Issuance of Series A preferred stock (net
of issuance costs) .................................... -- -- 1,835
Issuance of Series B preferred stock (net
of issuance costs) .................................... -- -- 3,505
Issuance of Series C preferred stock (net
of issuance costs) .................................... -- -- 2,753
Issuance of Redeemable Convertible Preferred Stock ...... -- 290 792
Issuance of stock warrants .............................. -- -- 35
Exercise of stock warrants .............................. -- -- --
Issuance of convertible subordinate
promissory notes ...................................... -- -- 2,932
-------- -------- --------
Net cash provided by financing
activities ..................................... (426) 295 25,756
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ........................................ (1,613) (1,447) 11,002
CASH AND CASH EQUIVALENTS, beginning of period ............. 4,721 12,449 --
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period ................... $ 3,108 $ 11,002 $ 11,002
======== ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Conversion of subordinated promissory notes
to preferred stock .................................... $ -- $ -- $ 2,814
Conversion of preferred stock to common stock ........... $ -- $ 3 $ 3
Stock issued for subscription receivable ................ $ -- $ -- $ 48
Warrants issued in connection with convertible
subordinated notes .................................... $ -- $ -- $ 138
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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6
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 March 31, 1998, the consolidated results of operations for the three months
ended March 31, 1997 and 1998, and the consolidated cash flows for the three
months ended March 31, 1997 and 1998. 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,
1997. 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, 1997 financial
statements and notes thereto included in the Company's Annual Report on Form
10K.
The results of operations for the three months ended March 31, 1998 are
not necessarily indicative of the results to be expected for the full fiscal
year.
2. NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share" effective for fiscal years ending after December 15,
1997. The Company adopted the new guidelines for the calculation and
presentation of earnings per share and all prior periods have been restated.
Basic earnings per share is based upon the weighted average number of shares
outstanding. Diluted earnings per share is based upon the weighted average
number of shares outstanding and the dilutive effect of 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 ("SEC") Staff
Accounting Bulletin ("SAB") No. 83, common stock, and CSEs issued at prices
below the public offering price during the 12-month period prior to the Offering
were included in the calculation as if they were outstanding for all periods
presented, regardless of whether they are dilutive. In February 1998, SEC staff
released SAB No. 98 on computations of earnings per share. SAB No. 98 replaces
SAB No. 83 in its entirety and requires, among other items, that only "nominal
issuances" of common stock be reflected in the calculation as if they were
outstanding for all periods presented and that the calculation be made in
accordance with Statement No. 128 for periods subsequent to the Offering.
Accordingly, for all periods presented, common stock equivalents have been
excluded from diluted weighted average shares outstanding as their impact was
antidilutive.
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7
3. FLUORRX
In December 1996, SpectRx (the "Company") sublicensed certain
technology to and acquired a 65% interest in FluorRx, a corporation organized
for the purpose of developing and commercializing technology related to
fluorescence spectroscopy. The Company's interest in FluorRx is represented by
two seats on the board of directors and 129,000 shares of convertible preferred
stock purchased for $250,000. In December 1997 and March 1998, FluorRx sold
additional convertible preferred stock for net cash proceeds of $521,000 and
$429,000, respectively. The issuance of additional preferred stock reduced the
Company's ownership (on an as converted basis) to 54%. Through December 1997,
the Company fully consolidated the losses of FluorRx, which on a cumulative
basis amounted to $690,000. The losses were fully consolidated as the Company
represented FluorRx's sole source of financial support and substantially all the
capital at risk related to investments and advances from the Company. Due to the
additional funding in December 1997 and March 1998, the Company recognized 54%
of the loss during the quarter ending March 31, 1998. The remaining 46% is
reflected as minority interest in the loss of FluorRx and has been classified as
other income in the accompanying statement of operations.
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8
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,
the public sales of common stock 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"), Roche Diagnostics BMC
("Roche")and Respironics, Inc. ("Respironics") 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. At March 31,
1998, as a result of subsequent financing, SpectRx's interest in FluorRx was
53%.
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 March 31, 1998, the Company had
an accumulated deficit of approximately $14.1 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. During
the first quarter of 1998 the Company began manufacturing its infant jaundice
product in anticipation of product shipment the second quarter of 1998.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
-8-
<PAGE> 9
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, Roche Diagnostics and Respironics 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, Roche
Diagnostics BMC and Respironics. 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.
-9-
<PAGE> 10
10
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997.
General. Net losses increased to approximately $2.0 million during the
three months ended March 31, 1998 from approximately $1.2 million during the
same period in 1997 due to an increase in research and development expenses and
cost of sales. The decrease in revenue to $50,000 in the three months ended
March 31, 1998 versus $76,000 in the same period in 1997 is a result of having
reached a smaller development milestone on the Company's infant jaundice product
in the first quarter of 1998. The Company expects similar net losses to
continue.
Cost of Sales. Cost of sales were $250,000 for the three months ended
March 31, 1998 versus $0 during the same period of 1997. The increase represents
excess production costs associated with the first quarter of manufacturing the
infant jaundice device for sale.
Research and development expenses. Research and development expenses
increased to approximately $1,094,000 during the three months ended March 31,
1998 from approximately $526,000 during the same period in 1997. 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 $235,000 during the three months ended March 31, 1998 from
approximately $138,000 during the same period in 1997. 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
of approximately $707,000 during the three months ended at March 31, 1998 were
virtually identical to the approximately $709,000 incurred during the same
period in 1997. 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 and other income. Net interest and other income increased to
$279,000 during the three months ended March 31, 1998 from $48,000 during the
same period in 1997. This increase results from an increase in interest received
on cash balances received from the initial public offering and the minority
interest in the loss of FluorRx.
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<PAGE> 11
11
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
private sales of its debt and private and public sales of its equity securities.
From October 27, 1992 (inception) through March 31, 1998, the Company received
approximately $25.4 million in net proceeds from sales of its debt and equity
securities. At March 31, 1998, the Company had cash of approximately $11.0
million and working capital of approximately $10.4 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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12
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 15 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 begun shipping its first product and has
only tested prototypes of its other 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.
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<PAGE> 13
13
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) Roche Diagnostics BMC under which Roche 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) Respironics under which Respironics 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, Roche and
Respironics. 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
be able, 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
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.
On February 11, 1998, Healthdyne merged with Respironics, with Respironics
as the surviving entity. There can be no assurance that the change in control of
Healthdyne will not adversely affect the Company's collaborative arrangement
with Healthdyne. On March 5, 1998, Roche Holding, Ltd. acquired Corange, Ltd.,
which is the parent company of Boehringer Mannheim, GmbH., the parent company of
Boehringer Mannheim. There can be no assurance that the 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 March 31, 1998, the Company had
an accumulated deficit of approximately $14.1 million. To date, the Company has
engaged primarily in research and development efforts. The Company began
shipping initial orders of the BiliCheck product subsequent to the end of the
first quarter of 1998. Prior to that, the Company had never generated revenues
from product sales and did 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 significant 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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15
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 and its diabetes screening product to be filed in 1988.
A 510(k) for the glucose monitoring product is expected to be filed after the
completion of development. 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
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 has obtained ISO 9001 certifications and CE mark certification,
which is an international symbol of quality and compliance with applicable
European medical device directives. Failure to obtain 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 be able to maintain its ISO 9001 certification or CE mark
certification, will be able to 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. 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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17
The Company will rely upon Abbott, Roche Diagnostics BMC and Respironics
to obtain United States and foreign regulatory approvals and clearances for its
glucose monitoring, diabetes screening and infant jaundice 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 affect 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
Respironics 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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18
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, Roche Diagnostics BMC and Respironics 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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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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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.
Little Manufacturing Experience; Dependence on Sole Sources of Supply
To date, the Company's manufacturing activities have consisted only of
building certain prototype devices and pre-release versions of its BiliCheck and
BiliCal products. If the Company successfully develops its diabetes screening
and infant jaundice products and, together with Roche Diagnostics BMC and
Respironics, obtains FDA clearance and other regulatory approvals to market
these products, the Company will undertake to manufacture these products in
significant volumes. 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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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 Respironics, 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 six 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. While the Company has signed distributor agreements for its
BiliCheck(TM) and BiliCal(TM) products 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 Roche Diagnostics BMC 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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22
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, Roche Diagnostics BMC and Respironics
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 15
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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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. 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.
Significant Influence of Directors, Executive Officers and Affiliated Entities
The Company's directors, executive officers and entities affiliated with
them in the aggregate, beneficially own approximately 46% of the Company's
outstanding Common Stock. These stockholders, acting together, would have
significant influence over 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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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.
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.
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 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 March 31, 1998.
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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: May 14, 1998 By: /S/ THOMAS H. MULLER, JR.
-------------------------------
Thomas H. Muller, Jr.
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
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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) Stock Purchase Agreement, dated June 30, 1994, between Mark A.
Samuels and the Company.
10.4(1) Stock Purchase Agreement, dated June 30, 1994, between Keith D.
Ignotz and the Company.
10.5(1) Assignment and Bill of Sale, dated February 29, 1996, between
LAO and the Company.
10.6(1) Security Agreement, dated October 31, 1996, between Mark A.
Samuels and the Company.
10.7(1) Security Agreement, dated October 31, 1996, between Keith D.
Ignotz and the Company.
10.8A(1)+ License Agreement, dated May 7, 1991, between Georgia Tech
Research Corporation and Laser Atlanta Optics, Inc..
10.8B(1) Agreement for Purchase and Sale of Technology, Sale, dated
January 16, 1993, between Laser Atlanta Optics, Inc. and the
Company.
10.8C(1) First Amendment to License Agreement, dated October 19, 1993,
between Georgia Tech Research Corporation and the Company.
10.9(1) Clinical Research Study Agreement, dated July 22, 1993, between
Emory University and the Company.
10.10A(1)+ Development and License Agreement, dated December 2, 1994,
between Boehringer Mannheim Corporation and the Company.
10.10B(1)+ Supply Agreement, dated January 5, 1996, between Boehringer
Mannheim and the Company.
10.11(1) Sponsored Research Agreement, No. SR95-006, dated May 3, 1995,
between University of Texas, M.D. Anderson Cancer Center and the
Company.
</TABLE>
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<PAGE> 28
28
<TABLE>
<S> <C>
10.12(1) Sole Commercial Patent License Agreement, dated May 4, 1995,
between Martin Marietta Energy Systems, Inc. and the Company.
10.13A(1) License Agreement, dated November 22, 1995, between Joseph R.
Lakowicz, Ph.D. and the Company.
10.13B(1) Amendment of License Agreement, dated November 28, 1995, between
Joseph R. Lakowicz, Ph.D. and the Company.
10.13C(1) Second Amendment to License Agreement, dated March 26, 1997,
between Joseph R. Lakowicz, Ph.D. and the Company.
10.14(1) License and Joint Development Agreement, dated March 1, 1996,
between NonInvasive-Monitoring Company, Inc., Altea
Technologies, Inc. and the Company.
10.15(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.
10.16(1)+ Purchasing and Licensing Agreement, dated June 19, 1996, between
Healthdyne and the Company.
10.17(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.
10.18A(1)+ Research and Development and License Agreement, dated October
10, 1996, between Abbott Laboratories and the Company.
10.18B(3)+ Letter Agreement, dated December 22, 1997, between Abbott
Laboratories and the Company.
10.19(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. (for SEC use only).
</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.
(3) Incorporated by reference to the exhibit filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997 filed March 27,
1998.
+ Confidential treatment granted for portions of these agreements.
-28-
<PAGE> 1
1
SpectRx, Inc. EXHIBIT 11.1
COMPUTATION OF LOSS PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------
1997 1998
---- ----
<S> <C> <C>
Net Loss (1,249) (1,957)
Weighted average Common Stock
outstanding during the period 1,494 7,749
Basic and Diluted
----- ------
Loss Per Share Basic and Diluted (0.84) (0.25)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 11,002
<SECURITIES> 0
<RECEIVABLES> 51
<ALLOWANCES> 0
<INVENTORY> 504
<CURRENT-ASSETS> 11,703
<PP&E> 1,418
<DEPRECIATION> 593
<TOTAL-ASSETS> 13,356
<CURRENT-LIABILITIES> 1,274
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 11,040
<TOTAL-LIABILITY-AND-EQUITY> 13,356
<SALES> 50
<TOTAL-REVENUES> 50
<CGS> 250
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,036
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (144)
<INCOME-PRETAX> (1,957)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,957)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,957)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
