<PAGE> 1
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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 JUNE 30, 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 June 30, 1998, was 8,000,154.
<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, 1997 AND JUNE 30, 1998.................... ...........3
CONSOLIDATED STATEMENTS OF OPERATIONS -
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998..................4
CONSOLIDATED STATEMENTS OF CASH FLOWS -
SIX MONTHS ENDED JUNE 30, 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 AND USE OF PROCEEDS ............................26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.........................................26
SIGNATURES................................................................................26
EXHIBIT INDEX.............................................................................28
</TABLE>
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<PAGE> 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>
JUNE 30
DECEMBER 31, 1998
1997 (unaudited)
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash & Cash Equivalents $ 12,449 $ 8,542
Accounts Receivable 554 508
Inventory 218 440
Other Current Assets 117 129
------------ -----------
Total Current Assets 13,338 9,619
PROPERTY & EQUIPMENT, net of accumulated depreciation of $507 and
$675 in 1997 and 1998 respectively 930 976
------------ -----------
OTHER ASSETS, NET
Other Assets 289 282
Due from related parties 442 456
------------ -----------
Total Other Assets 731 738
------------ -----------
TOTAL ASSETS $ 14,999 $ 11,333
============ ===========
LIABILITIES & STOCKHOLDERS (DEFICIT) EQUITY
CURRENT LIABILITIES
Accounts Payable $ 515 $ 277
Accrued Liabilities 758 996
------------ -----------
Total Current Liabilities 1,273 1,273
CONVERTIBLE NOTE 250 0
MINORITY INTEREST 502 659
STOCKHOLDERS' (DEFICIT) EQUITY
Common Stock 8 8
Additional paid-in-capital 25,372 25,739
Deferred compensation (210) (172)
Accumulated deficit (12,148) (16,143)
Notes Rec. from officers (48) (31)
------------ -----------
Total Stockholders'(deficit)equity 12,974 9,401
------------ -----------
TOTAL LIABILITIES & EQUITY $ 14,999 $ 11,333
============ ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets.
-3-
<PAGE> 4
SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SpectRx
Consolidated Statement of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period from Inception
Three Months Six Months (October 27,1992)
Ended June 30, Ended June 30, to June 30
1997 1998 1997 1998 1998
------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C>
REVENUE
Product Sales $ 0 $ 289 $ 0 $ 289 $ 289
Collaborative agreements 200 100 276 150 2,804
------- ------- ------- ------- --------------
Total 200 389 276 439 3,093
COST OF SALES 0 461 0 711 711
------- ------- ------- ------- --------------
GROSS MARGIN 200 (72) 276 (272) 2,382
EXPENSES
Research & development 762 1,103 1,288 2,197 10,136
Sales & marketing 150 337 288 572 2,096
General & administrative 533 797 1,242 1,504 6,978
------- ------- ------- ------- --------------
Total 1,445 2,237 2,818 4,273 19,210
------- ------- ------- ------- --------------
Operating loss (1,245) (2,309) (2,542) (4,545) (16,828)
OTHER EXPENSE (INCOME) 5 (123) 7 (258) 260
INTEREST EXPENSE (INCOME) (38) (147) (88) (291) (944)
------- ------- ------- ------- --------------
NET LOSS $(1,212) $(2,038) $(2,461) $(3,995) $ (16,143)
======= ======= ======= ======= ==============
Net Loss Per Share
Basic $ (0.79) $ (0.26) $ (1.61) $ (0.51)
======= ======= ======= =======
Diluted $ (0.79) $ (0.26) $ (1.61) $ (0.51)
======= ======= ======= =======
Weighted Average Shares Outstanding
Common Equivalent Shares Outstanding
Basic 1,532 7,929 1,532 7,839
===== ===== ===== =====
Diluted 1,532 7,929 1,532 7,839
===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
-4-
<PAGE> 5
SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended Period From Inception
June 30, (October 27, 1992)
1997 1998 to June 30, 1998
---- ---- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(2,461) $ (3,995) $ (16,143)
------- -------- ----------------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 93 190 867
Amortization of debt discount 0 0 138
Issuance of stock in settlement of dispute 0 0 14
Amortization of deferred compensation 38 38 132
Minority Interest in Loss of FluorRx 0 (261) (261)
Changes in assets and liabilities:
Accounts receivable (1) 46 (508)
Other assets (98) (250) (804)
Due from related parties (15) (14) (456)
Accounts payable 311 (238) 277
Accrued liabilities 340 277 1,148
------- -------- ----------------
Total adjustments 668 (212) 547
Net cash used in operating activities (1,793) (4,207) (15,596)
------- -------- ----------------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment (270) (214) (1,651)
Additions to purchased technology (5) 0 (205)
------- -------- ----------------
Net cash used in investing activities (275) (214) (1,856)
------- -------- ----------------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock (net of issuance costs) 0 96 13,992
Issuance of Series A preferred stock (net of issuance costs) 0 0 1,838
Issuance of Series B preferred stock (net of issuance costs) 0 0 3,505
Issuance of Series C preferred stock (net of issuance costs) 0 0 2,753
Issuance of Redeemable Convertible Preferred Stock of FluorRx 0 418 939
Issuance of stock warrants 0 0 35
Payment of Stock Issuance Costs (896) 0 0
Issuance of convertible subordinate promissory notes 0 0 2,932
------- -------- ----------------
------- -------- ----------------
Net cash provided by financing activities (896) 514 25,994
------- -------- ----------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (2,964) (3907) 8,542
CASH AND CASH EQUIVALENTS, beginning of period 4,721 12,449 0
------- -------- ----------------
------- -------- ----------------
CASH AND CASH EQUIVALENTS, end of period $ 1,757 $ 8,542 $ 8,542
======= ======== ================
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING & FINANCING ACTIVITIES:
Conversion of subordinate promissory notes
to preferred stock 0 0 2,814
Conversion of Promissory note to common stock 0 289 289
Conversion of preferred stock to common stock 0 3 3
Stock issued for subscription receivable 0 0 48
Warrants issued in connection with convertible 0 0 138
subordinate notes
Issuance of common stock for purchased technology 0 0 35
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
-5-
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 June 30, 1998, the consolidated results of operations for the three months
and for the six months ended June 30, 1997 and 1998, and the consolidated cash
flows for the six months ended June 30, 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 and six months ended June
30, 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.
-6-
<PAGE> 6
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 53%. 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 53% of the loss
during the quarter ending June 30, 1998. The remaining 47% is reflected as
minority interest in the loss of FluorRx and has been classified as other income
in the accompanying statement of operations.
4. COMPREHENSIVE INCOME
The Company currently has no other Comprehensive Income items as defined
by SFAS No. 130.
-7-
<PAGE> 7
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 June 30,
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 June 30, 1998, the Company had
an accumulated deficit of approximately $16.1 million. To date, the Company has
engaged primarily in research and development efforts. Although the Company
generated revenues from product sales for the first time in the three months
ended June 30, 1998, the Company does not have extended 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> 8
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.
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> 9
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997.
General. Net losses increased to approximately $2.0 million during the
three months ended June 30, 1998 from approximately $1.2 million during the same
period in 1997 primarily due to an increase in research and development expenses
and cost of sales. The Company expects similar net losses to continue.
Revenue. The Company has historically only received revenue from achieving
development milestones with one or more of its strategic partners. The Company
began shipping its infant jaundice product to distributors outside of the United
States and Canada during the quarter ended June 30, 1998. The increase in
revenue to $389,000 in the three months ended June 30, 1998 versus $200,000 in
the same period in 1997 is a result of having realized product revenue of
approximately $290,000 versus none in 1997, and having reached a smaller
development milestone on the Company's infant jaundice product in the second
quarter of 1998.
Cost of Sales. Cost of sales were $461,000 for the three months ended June
30, 1998 versus $0 during the same period of 1997. While a portion of the cost
of sales increase is directly related to product revenue, the majority of the
increase represents excess capacity production charges. The Company expects
excess capacity to exist for at least the remainder of this year.
Research and development expenses. Research and development expenses
increased to approximately $1,103,000 during the three months ended June 30,
1998 from approximately $762,000 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 continues development and expands clinical trials
for its products.
Sales and marketing expenses. Sales and marketing expenses increased to
approximately $337,000 during the three months ended June 30,1998 from
approximately $150,000 during the same period in 1997. The increase was due
primarily to an increase in size of its marketing organization for the Company's
infant jaundice product and to support the product rollout in the quarter. Sales
and marketing expenses are expected to increase in the future as the Company
markets this product in more countries.
General and administrative expenses. General and administrative expenses
increased to approximately $797,000 during the three months ended at June 30,
1998 compared to the approximately $533,000 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
$270,000 during the three months ended June 30, 1998 from $33,000 during the
same period in 1997. This increase results from an increase in interest received
on cash balances received from the initial public offering offset by the
minority interest in the loss of FluorRx.
<PAGE> 10
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997.
General. Net losses increased to approximately $4.0 million during the six
months ended June 30, 1998 from approximately $2.5 million during the same
period in 1997 primarily due to an increase in research and development expenses
and cost of sales.
Revenue. The Company began shipping its infant jaundice product to
distributors outside of the United States and Canada during the quarter ended
June 30, 1998. The increase in revenue to $439,000 in the six months ended June
30, 1998 versus $276,000 in the same period in 1997 is a result of having
realized product revenue of approximately $290,000 versus none in 1997, and
having reached smaller development milestones on the Company's infant jaundice
product.
Cost of Sales. Cost of sales were $711,000 for the six months ended June
30, 1998 versus $0 during the same period of 1997. While a portion of the cost
of sales increase is directly related to product revenue, the majority of the
increase represents excess capacity production charges. The Company expects
excess capacity to exist for at least the remainder of this year.
Research and development expenses. Research and development expenses
increased to approximately $2.2 million during the six months ended June 30,
1998 from approximately $1.3 million 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 continues development and expands clinical trials
for its products.
Sales and marketing expenses. Sales and marketing expenses increased to
approximately $572,000 during the six months ended June 30, 1998 from
approximately $288,000 during the same period in 1997. The increase was due
primarily to increase in size of its marketing organization for the Company's
infant jaundice product and to support the product rollout. Sales and marketing
expenses are expected to increase in the future as the Company begins to expand
its marketing for this product.
General and administrative expenses. General and administrative expenses
increased to approximately $1.5 million during the six months ended at June 30,
1998 compared to the approximately $1.2 million 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
$549,000 during the six months ended June 30, 1998 from $81,000 during the same
period in 1997. This increase results from an increase in interest received on
cash balances received from the initial public offering offset by the minority
interest in the loss of FluorRx.
-11-
<PAGE> 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 June 30, 1998, the Company received
approximately $25.7 million in net proceeds from sales of its debt and equity
securities. At June 30, 1998, the Company had cash of approximately $8.5 million
and working capital of approximately $8.3 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
collaborative relationships or cing, additional 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.
-12-
<PAGE> 12
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 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.
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<PAGE> 13
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 June 30, 1998, the Company had
an accumulated deficit of approximately $16.1 million. To date, the Company has
engaged primarily in research and development efforts. The Company began
shipping initial orders of the BiliCheck product in the second 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 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.
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<PAGE> 14
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 1998.
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.
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<PAGE> 15
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 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, or 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 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.
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<PAGE> 16
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.
-17-
<PAGE> 17
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 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.
-18-
<PAGE> 18
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 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.
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<PAGE> 19
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 the initial production of its BiliCheck
and BiliCal products. If the Company successfully develops its diabetes
screening product and successfully markets its infant jaundice product 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 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.
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<PAGE> 20
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.
Little Marketing and Sales Experience
The Company is responsible for marketing the infant jaundice product in
countries other than the United States and Canada. The Company has little
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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<PAGE> 21
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 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.
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<PAGE> 22
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 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.
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<PAGE> 23
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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<PAGE> 24
PART II. OTHER INFORMATION
On July 1, 1997, the Company commenced and completed its initial public
offering (the "IPO") of 2,361,699 shares (including 201,699 shares sold by
selling stockholders and including the exercise of the underwriters'
over-allotment option consisting of 160,000 shares) of its Common Stock, $0.001
par value per share at a public offering price of $7.00 per share pursuant to a
registration statement on Form S-1 (file no. 333-80453) filed with the
Securities and Exchange Commission. All of the shares registered were sold.
Hambrecht & Quist LLC and Volpe Brown Whelan & Company, LLC were the managing
underwriters of the IPO. Aggregate gross proceeds to the Company from the IPO
(prior to deduction of underwriting discounts and commissions and expenses of
the offering) were $15,120,000.
The Company paid underwriting discounts and commissions of $1,058,400 and
other expenses of approximately $896,000 in connection with the IPO. The total
expenses paid by the Company in the IPO were $1,954,400, and the net proceeds to
the Company in the IPO were $13,165,600.
From June 30, 1997, the effective date of the Registration Statement to
June 30, 1998 (the Company's fiscal year end), the approximate amount of net
proceeds used were $2.8 million for the funding of the development of the
Company's infant jaundice and diabetes screening products, $2.1 million for
developing production capacity and increasing inventory, $1.1 million to develop
sales, marketing and distribution capability and $0.3 million for other internal
Research and Development. None of such payments consisted of direct or indirect
payments to directors, officers, 10% stockholders or affiliates of the Company.
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 June 30, 1998.
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<PAGE> 25
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: August 14, 1998 By: /S/ THOMAS H. MULLER, JR.
----------------------------------------
Thomas H. Muller, Jr.
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
-26-
<PAGE> 26
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>
-27-
<PAGE> 27
<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
SpectRx, Inc. EXHIBIT 11.1
COMPUTATION OF LOSS PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30
------------------ ------------------
1997 1998 1997 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Loss $(1,212) $(2,038) $(2,461) $(3,995)
Weighted average Common Stock
outstanding during the period 1,532 7,929 1,532 7,839
Basic and Diluted
------- ------- ------- -------
Loss Per Share Basic and Diluted $ (0.79) $ (0.26) $ (1.61) $ (0.51)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SPECTRX, INC. FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,542
<SECURITIES> 0
<RECEIVABLES> 508
<ALLOWANCES> 0
<INVENTORY> 440
<CURRENT-ASSETS> 9,619
<PP&E> 1,651
<DEPRECIATION> 675
<TOTAL-ASSETS> 11,333
<CURRENT-LIABILITIES> 1,273
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 9,401
<TOTAL-LIABILITY-AND-EQUITY> 11,333
<SALES> 289
<TOTAL-REVENUES> 439
<CGS> 711
<TOTAL-COSTS> 711
<OTHER-EXPENSES> 4,273
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (291)
<INCOME-PRETAX> (3,995)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,995)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,995)
<EPS-PRIMARY> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
