<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the fiscal year ended December 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 no.)
6025A Unity Drive, Norcross, GA 30071
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (770) 242-8723
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of class)
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
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosures of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant was approximately $41.1 million as of February 28, 1999, based
upon the average of the high and low prices of the Registrant's Common Stock
reported for such date by the Nasdaq National Market. Shares of Common Stock
held by each executive officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded in that such persons may
be deemed to be affiliates. The determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of February 28, 1999, the Registrant had outstanding 8,014,080
shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE.
Parts of the following documents are incorporated by reference in Part
III of this Form 10-K Report: Proxy Statement for Registrant's 1999 Annual
Meeting of Shareholders -- Items 10, 11, 12 and 13.
<PAGE> 2
PART I
ITEM 1. BUSINESS
OVERVIEW
SpectRx is engaged in the research, development, manufacturing, and
marketing of products that offer less invasive and painless alternatives to
blood tests currently used for infant jaundice, diabetes screening, glucose
monitoring and cancer detection. The Company's products are based on proprietary
biophotonic technology that can eliminate the pain and inconvenience of tissue
and blood samples. Biophotonics is the technology of using light and other forms
of energy to detect and monitor medical conditions. The Company has entered into
collaborative arrangements with Respironics, Inc. ("Respironics") through its
acquired business, Healthdyne Technologies, Inc., Abbott Laboratories
("Abbott"), Roche Diagnostics Boehringer Mannheim Corp. ("Roche Diagnostics
BMC") and Welch Allyn, Inc. ("Welch Allyn") to facilitate the development,
commercialization and introduction of its infant jaundice, diabetes screening,
glucose monitoring and cancer detection products, respectively.
SPECTRX'S BUSINESS STRATEGY
The Company's goal is to introduce products that reduce or eliminate
pain, are convenient to use and provide rapid results at the point of care,
thereby improving patient well being and reducing health care costs. To achieve
this objective, the Company is pursuing the following business strategy.
- Focus on Current Products. The Company intends to
continue to advance its current products to commercialization
by (i) leveraging the expertise of its collaborative partners,
(ii) seeking 510(k) clearance from the United States Food and
Drug Administration ("FDA") for these products where possible,
(iii) expanding its internal product development capabilities,
and (iv) developing its sales, marketing and manufacturing
capabilities. This includes the manufacturing and marketing of
its BiliChek(TM) system and the continued development and
introduction of the Company's diabetes screening product.
- Develop Additional Products. Develop additional products from
the current product foundation. The Company believes that its
development activities in glucose monitoring and cancer
detection have significant promise for as many as four
additional product offerings that utilize the Company's
biophotonic technologies. The Company believes that its
diabetes screening product will lead to increased testing,
enlarging the market for glucose monitoring. The Company also
believes that the cancer detection products will be an
extension upon the technology used in the BiliChek(TM) and
Diabetes Screening products.
- Collaborate with Market Leaders. The Company has selectively
established collaborative arrangements with Abbott, Roche
Diagnostics BMC, Respironics and Welch Allyn to develop and
commercialize its products. The Company intends to continue
selectively establishing strategic relationships with leading
companies, as appropriate, for the development,
commercialization and introduction of future products.
- Leverage Proprietary Technologies. The Company intends to
leverage its proprietary biophotonic technologies by
developing future products based on these technologies that
can provide cost effective, less invasive alternatives to
current diagnostic or monitoring products. For example, the
Company believes its interstitial fluid sampling technology
may be applicable for monitoring analytes other than glucose.
- Address Large Market Opportunities. The Company intends to
selectively develop future products for large markets in which
its products can ideally (i) apply for 510(k) clearance from
the FDA, (ii) incorporate a disposable component and (iii)
qualify for third-party reimbursement.
-2-
<PAGE> 3
INDUSTRY OVERVIEWS
INFANT JAUNDICE
Background
Infant jaundice is a condition that primarily affects newborns within
the first three to ten days of life. If left untreated infant jaundice may, in
extreme cases, lead to brain damage or death (kernicterus). Jaundice is
characterized by a yellowing of the skin and eyes caused by an excess of
bilirubin in the body. Bilirubin is a normal waste product resulting from the
breakdown of red blood cells and is removed from the body by the liver. Prior to
birth, the bilirubin in an infant is processed by the mother's liver and
excreted. After birth, an infant must eliminate bilirubin without the mother's
help. It may take the infant's system several days to begin eliminating the
bilirubin faster than it is produced. Infants who are born prematurely, who are
underfed, or who belong to certain ethnic groups are at increased risk of
developing jaundice. The initial screening for jaundice is the observation of
yellow skin. This is a subjective determination prone to errors due to differing
skin colors and gestational ages. If a baby is selected for further jaundice
testing, the current procedure requires that a blood sample be obtained from the
infant, usually by lancing the infant's heel, which is a traumatic process for
the infant. Since jaundice normally presents in infants 36 to 72 hours after
birth, infants who are sent home after a short hospital stay pursuant to managed
care guidelines in the United States are at risk because the condition may not
have presented prior to release.
The Infant Jaundice Screening and Monitoring Market
Of the approximately four million newborns each year in the United
States, approximately 60% have recognizable jaundice. Annually, approximately
1.7 million newborns receive at least one blood test for bilirubin. Of those
newborns tested, approximately 700,000 have elevated bilirubin levels, and a
portion of these newborns will receive additional tests. The cost to the patient
for a bilirubin test ranges from $22.25 to $37.75; the laboratory processing
cost usually ranges from $10.00-$12.00. Many of those infants in the United
States diagnosed with jaundice will undergo phototherapy, a treatment that
converts bilirubin into a water soluble form that can be processed and
eliminated from the infant's system. The Company believes that the average
newborn under active phototherapy treatment receives three to four bilirubin
monitoring tests.
The SpectRx Non-Invasive Infant Jaundice Product
The Company's infant jaundice product, named the "BiliChek(TM)"
Non-Invasive Bilirubin Analyzer (sold internationally as BiliCheckTM) is based
upon reflection spectroscopy and measures bilirubin regardless of the patient's
skin color or gestational age. The product is designed to provide rapid,
point-of-care bilirubin measurements and to serve as an initial screening and
ongoing monitoring device. The Company believes that the BiliChek(TM) has the
potential to replace the painful heel stick procedure currently utilized.
The design of the BiliChek(TM) consists of a hand held,
battery-operated instrument, which sits in a compact charger base. This
instrument incorporates a microspectrometer to collect spectroscopic information
from the skin and a proprietary, disposable calibration element, BiliCal(TM).
After calibration, the instrument is applied to the skin of the infant for five
applications, which generally takes less than one minute, during this time the
bilirubin level is measured by collecting the light reflected from the skin and
analyzing it using a proprietary algorithm that adjusts for interfering factors
that are present due to skin color, gestational age and other factors.
In 1998, the Company received ISO 9001/EN 46001 certification and was
granted the CE mark which allowed it to begin selling the BiliChek(TM)
internationally. In April 1998, the Company announced it had begun commercially
shipping BiliChek(TM) units to certain international distributors. The
BiliChek(TM) is currently being marketed in more than 46 countries worldwide. In
August 1998, the Company announced that a 510(k) premarket notification
submission was filed with the U.S. Food and Drug Administration (FDA) on behalf
of the BiliChek(TM) by Respironics (formerly Healthdyne Technologies). In March
1999, the Company announced that it had received clearance from the FDA to
market the BiliChek(TM) in the U.S. FDA approval also will allow the shipment of
BiliChek(TM) systems to Mexico and other South American and Asian countries that
rely on FDA clearance before allowing import of U.S.-made medical products. In
-3-
<PAGE> 4
September 1998, Atom Medical Corporation was named as distributor of the
BiliChek(TM) in the Japanese market pending approval of the device by the
Japanese Ministry of Health and Welfare. Respironics began marketing the product
in Canada in October 1998.
Respironics commenced marketing of the BiliChek(TM) in the United
States after obtaining FDA clearance. Respironics has delivered to SpectRx a
comprehensive marketing launch plan in which they will utilize advertising,
direct mail, telemarketing and the Respironics sales force (more than 100
representatives) to introduce the BiliChek(TM) to all segments of the market
including hospital nurseries, pediatric offices, and home care providers. The
bundling and co-promotion of the BiliChek(TM) with Respironics' other neonatal
products, including apnea monitors and fiber-optic infant jaundice phototherapy
systems, support the product introduction. Nevertheless, Respironics retains 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. Accordingly, there can be no assurance that the
marketing schedules will be met, if at all.
The Company's BiliChek(TM) was developed pursuant to a collaborative
arrangement with Respironics. Under the terms of the arrangement, SpectRx
developed and manufactures the product and Respironics paid and will continue to
pay certain costs associated with additional product developmental and clinical
trials. Respironics has been granted a license to market and sell the product in
the United States and Canada, while SpectRx retains the rights to sell the
product in all other geographic markets.
DIABETES
Background
Diabetes is a major health care problem which, according to the World
Health Organization, is estimated to affect 100 million people worldwide by the
year 2000. If undiagnosed and untreated, diabetes can lead to severe medical
complications over time, including blindness, loss of kidney function, nerve
degeneration, and cardiovascular disease. Diabetes is the sixth leading cause of
death by disease in the United States and is estimated to cost the American
economy over $110 billion annually, including indirect costs such as lost
productivity.
Diabetes occurs when the body does not produce sufficient levels of,
or effectively utilize, insulin, a hormone that regulates the metabolism
(breakdown) of glucose. Glucose levels in the blood must be within a specific
concentration range to ensure proper cellular function and health. Insulin
deficiency results in an abnormally high blood glucose concentration, which
causes protein glycation throughout the body, impairs the ability of cells to
intake glucose and has other adverse effects. In Type I (insulin-dependent
juvenile-onset) diabetes, which affects from 5% to 10% of all people with
diagnosed diabetes, the cells that make insulin have been destroyed. Type I
diabetes is treated with daily insulin injections. In the more prevalent form of
diabetes, Type II (non-insulin-dependent adult-onset) diabetes, the insulin
producing cells are unable to produce enough insulin to compensate for the
patient's poor sensitivity to the hormone in glucose-using tissues such as
skeletal muscle (a condition called insulin resistance). Type II diabetes is
initially managed with proper diet, exercise and oral medication. Based on
statistics published by the National Institutes of Health, however, the Company
estimates that approximately 50% of Type II diabetics will eventually require
insulin therapy.
The Diabetes Screening Market
The American Diabetes Association (the "ADA") estimates that
approximately 16 million people in the United States have diabetes, only 10.3
million have been diagnosed with the disease. The long term health care costs of
a diabetic patient can be substantially reduced if the patient can be diagnosed
in the early stages of the disease. Early diagnosis allows glucose levels to be
monitored and properly controlled, thereby reducing complications that result
from long term exposure to elevated glucose levels. These complications include
diabetic retinopathy, kidney disease, nerve degeneration, and cardiovascular
disease. Currently, approximately 798,000 new cases of diabetes are diagnosed
each year in the United States, and many of those diagnosed have complications
that generally appear eight to ten years after onset of the disease. The Company
believes that the low rate of diabetes diagnosis and the failure in many cases
to
-4-
<PAGE> 5
diagnose the disease prior to the onset of complications is due primarily to
the lack of a convenient and accurate diabetes screening test. The Company
believes that the market in the United States for diabetes screening tests is
approximately $300 million per year. In June 1997, the ADA altered its
recommendation for diabetes screening to increase the recommended level of
screening for all adults over 45 years old to every three years, which the
Company believes will increase market spending.
There are several diabetes screening tests in use today. The diabetes
screening procedure recommended by the ADA is the blood-based fasting plasma
glucose test. This test is difficult and inconvenient to administer because it
requires the patient to fast for eight hours prior to the drawing of blood, and
because the blood sample is usually sent to a laboratory for analysis, which
delays the receipt by the patient of the test results. Current methods for
diabetes screening that utilize random finger stick blood glucose tests are no
longer recommended by the ADA because the random nature of the tests results in
an unacceptably low level of sensitivity (i.e., the ability to correctly
determine that a particular person has diabetes) and specificity (i.e., the
ability to correctly determine that a particular person does not have diabetes).
Glucose urine test products, which are available over-the-counter, have an even
lower test sensitivity and specificity and are not recommended for screening by
the ADA. The low levels of sensitivity and specificity in both the random finger
stick blood glucose test and the glucose urine test result in cases of both
undetected diabetes, which can prevent early treatment of the disease in such
cases, and false indications of diabetes, which can cause patients to incur the
expense of, and devote the time for, needless additional testing.
The SpectRx Non-Invasive Diabetes Screening Product
The SpectRx non-invasive diabetes screening product is designed to
detect and measure fluorescence in the lens of the eye and evaluate that
measurement using the Company's proprietary algorithm. An abnormally high level
of fluorescence in the lens of the eye may be indicative of prolonged exposure
to high levels of glucose due to diabetes. A measurement indicating a patient is
likely to have diabetes could be confirmed by subsequent testing using
conventional blood-based diagnostics. The performance of the Company's diabetes
screening product has been shown to be comparable to that of the blood-based
screening test. Unlike the blood based tests, however, the SpectRx diabetes
screening product is painless, would provide the patient with test results in
less than a minute, and would not require the patient to fast for eight hours
prior to administration of the test.
The Company's non-invasive diabetes screening product is designed to
be simple and painless to use and to produce accurate point-of-care results in a
very short period of time. The Company believes that such a method of diabetes
screening is likely to become as prevalent as glaucoma testing, which is
regularly performed during eye exams. Thus, the Company believes that the
product may result in increased diagnoses of the approximately 50 million
undiagnosed diabetics worldwide, including the approximately 5.5 million in the
United States. For this reason, the Company believes that its non-invasive
diabetes screening product presents a substantial opportunity to identify new
patients who can benefit from proper treatment thereby reducing incidence of
complications and their associated cost.
The Company's non-invasive diabetes screening product is designed as a
compact instrument that will meet the space requirements of optometrists' and
physicians' offices and will also be suitable for retail establishments such as
pharmacies. To use the device, the individual looks into the instrument while
placing his or her head against a rest. The individual is instructed to look at
a fixed light as the instrument locates the eye and automatically tracks the
pupil opening. The device measures fluorescence in the lens of the eye using a
low-intensity blue light. The results of the analysis will indicate either that
the patient should undergo further diagnostic testing or that there is no
indication of diabetes. In a pilot study of more than 1,300 subjects (both
diabetics and non-diabetics) conducted by Roche Diagnostics BMC, an early stage
prototype of the Company's diabetes screening product demonstrated an ability to
detect diabetes.
The Company is in the process of final design and manufacturing
ramp-up of the product. In December, 1998, a 510(k) premarket notification
submission was filed with the U.S. Food and Drug Administration by Roche
Diagnostics BMC on behalf of the SpectRx non-invasive diabetes screening
product. Unexpected problems, however, may arise in the regulatory approval and
manufacturing processes. In addition, Roche Diagnostics BMC retains a
significant degree of discretion regarding the timing of these activities and
the amount and quality of financial, personnel and other resources that it
devotes to these activities. Accordingly, there can be no assurance that the
production or regulatory approval will occur.
-5-
<PAGE> 6
The Company has entered into a collaboration agreement with Roche
Diagnostics BMC, as a result the Company has granted Roche Diagnostics BMC an
exclusive worldwide license to sell and market the Company's non-invasive
diabetes screening product. The Company receives development milestone payments
and expects to receive a manufacturing profit on products sold to Roche
Diagnostics BMC. Roche Diagnostics BMC is responsible for conducting clinical
testing, obtaining regulatory approvals for, and the marketing, distribution and
sales of, the Company's diabetes screening product.
The Glucose Monitoring Market
People with diabetes have difficulty achieving optimal glucose
control. For proper glucose control, each insulin injection, or other form of
medication, should be adjusted to reflect the person's current blood glucose
concentration, carbohydrate consumption, exercise pattern, stress or other
illness. Accordingly, personal glucose monitoring products have become critical
in managing diabetes by allowing diabetics to measure their glucose levels in
order to adjust their diet, exercise and use of oral medication or insulin to
maintain proper blood glucose levels.
In June 1993, the National Institutes of Health announced the results
of the Diabetes Control and Complications Trial ("DCCT"). This long term study
of approximately 1,400 people with Type I diabetes confirmed the importance of
glucose control as a determinant of long term risk of degenerative
complications. The data from the DCCT demonstrated that the risk of degenerative
complications is significantly reduced if blood glucose concentrations in people
with Type I diabetes can be brought closer to the concentrations measured in
non-diabetic individuals. For example, the DCCT study demonstrated that the risk
of complications of diabetic retinopathy, the leading cause of blindness in the
United States, could be reduced by 76% through proper glucose control. The DCCT
panel recommended that Type I diabetics measure their blood glucose four times
per day in order to maintain proper control over their glucose levels. Although
the DCCT study involved people with Type I diabetes only, a similar Japanese
study on Type II diabetics supports the conclusion of the DCCT study that
maintaining low average glucose levels reduces the risks of complications
associated with diabetes.
Because glucose monitoring is an important part of the every day life
of the world's diagnosed diabetics, the personal glucose monitoring market is
substantial. The Company believes that the worldwide market for glucose
monitoring products at manufacturers' price levels is approximately $3.0 billion
annually and is growing at approximately 18% per year. The North American market
for such products was approximately $1.0 billion in 1996. The Company believes
that the market for personal glucose monitoring products is driven by four main
factors: 1) an aging population; 2) the realization that tight glucose control
dramatically reduces the risk of complications; 3) the availability of
third-party reimbursement in developed nations; and 4) the promotion and
increased availability of glucose monitoring products. It is estimated that
diabetics currently monitor their glucose on average less than twice a day
instead of the DCCT recommendation of four times per day. The Company believes
that the pain, inconvenience and cost associated with conventional finger stick
blood glucose monitoring systems is the primary reason that most people with
diabetes fail to comply with the recommendations of the DCCT panel. The Company
believes that greater awareness of the benefit of frequent self-monitoring and
less painful, more convenient monitoring products could significantly increase
the global market. Currently, no non-invasive glucose monitoring systems are
commercially available in the U.S.
Glucose monitoring products have evolved rapidly over time. Various
factors have allowed new entrants to establish market share in the glucose
monitoring product market, including technological advances, broader product
distribution and increased patient awareness of product innovations. These
factors have also expanded the overall size of the market for glucose monitoring
products.
Current commercially available glucose monitoring systems are painful
and inconvenient. These systems require that a blood sample be obtained from a
patient, applied to a disposable test strip and then measured for glucose
concentrations using a battery-powered, handheld monitor. Under these systems,
the blood sample is usually obtained from a patient's fingertip because of the
high concentration of capillaries at this site and because the blood produced at
the fingertip can most easily be applied directly to test strips used in such
devices. These systems typically require the patient to complete the following
steps: insert the disposable test strip into the meter, lance the finger, apply
the drop of blood to the test strip and wait for the meter to display the
results. Because nerve endings are concentrated in the
-6-
<PAGE> 7
fingertips, this sampling process can be painful. The level of patient
discomfort is compounded by the fact that the fingertips offer a limited surface
area from which to obtain a blood sample. Thus, the patient can be required to
repeatedly sample from the same site, eventually resulting in callouses. In
addition, applying the drop of blood to the test strip is difficult for those
diabetics who have lost dexterity in their extremities due to nerve
degeneration.
The SpectRx Glucose Monitoring Products
The Company is developing glucose monitoring products that utilize
the Company's proprietary interstitial fluid sampling technology that will
allow people with diabetes to easily and accurately measure their glucose
levels. Interstitial fluid is an extracellular fluid that is prevalent
throughout the body just beneath the skin. Interstitial fluid is the means by
which proteins and chemicals, including glucose, pass between capillaries and
cells. Studies based on the Company's and independent research have indicated
that interstitial fluid glucose levels correlate closely with blood glucose
levels. The Company believes that using interstitial fluid to assay glucose
levels is more efficient than using blood because it is free of
interferences such as red blood cells, which must often be separated from the
plasma prior to measurement. SpectRx's glucose monitoring products use the
Company's microporation technology to collect a sample of interstitial fluid.
This interstitial fluid sample may be measured once in a single-use application
which is the prevalent method for current blood-based monitoring. The Company's
microporation technology is also applicable to repeatedly sample a stream of
interstitial fluid for a continuous monitoring application. Products using
either sampling methodology, are intended to measure the glucose concentration
of the interstitial fluid using disposable assay technology. Because the
Company's glucose monitoring products are designed to obtain a sample of
interstitial fluid from the outermost layers of the skin and do not require a
blood sample, the use does not stimulate pain sensors and capillaries found in
the deeper layers of skin and is thus free of the pain and blood involved in
conventional finger stick assaying techniques. In addition, the Company
believes that the entire process will take no longer than current blood
glucose monitoring tests.
The Company began its research effort in the area of single use, or discrete
monitoring in collaboration with Abbott. The focus of research that applies
specifically to single use monitoring is now being conducted by Abbott. Since
the fall of 1998 SpectRx has focused its research efforts on applications in
the continuous monitoring area.
Single-use Glucose Monitoring Product
The single-use glucose monitoring product is expected to be comprised
of a small, hand held battery-powered, monitoring device and a proprietary,
disposable assay cartridge. The monitoring device will be placed on the skin,
and a laser or other suitable energy source mounted in the housing will be
directed onto the skin. When activated, an array of micropores will be
painlessly created in the outermost layer of skin, the stratum corneum. The
Company believes the creation of micropores will not damage adjacent tissue or
penetrate deeply enough to reach the capillary bed or nerve layer below the
stratum corneum. The Company anticipates that the device will have a proprietary
mechanism that will force the interstitial fluid out of the micropores and into
the disposable cartridge. When the assay cartridge is full and the interstitial
fluid has been analyzed, the results will appear on a display.
In January 1996, the Company undertook a pilot study of 10 subjects
(six diabetics and four nondiabetics) under a protocol reviewed and approved by
the Georgia Baptist Medical Center. The study was designed to evaluate the
correlation between results obtained using early stage prototypes of the
Company's glucose monitoring product and a leading conventional personal blood
glucose monitoring system. The study compared the glucose levels in interstitial
fluid and blood of the 10 subjects who were each administered 75 grams of
glucose. The study, which yielded a total of 876 glucose measurements (438
contemporaneous measurements of interstitial fluid and blood), produced a
correlation coefficient of 0.96 between glucose levels in interstitial fluid and
blood.
In October 1996, the Company entered into a collaborative arrangement
with Abbott for the development and commercialization of the Company's glucose
monitoring products. Pursuant to the arrangement, the Company granted Abbott an
exclusive worldwide license for the Company's single use glucose monitoring
product and other related glucose monitoring devices in all countries except
Singapore and the Netherlands, where the license is non-exclusive. Pursuant to
the terms of the collaborative arrangement, Abbott has agreed to pay all costs
associated with a joint research and development program, to make certain
milestone payments to the Company and to pay the Company a royalty based
-7-
<PAGE> 8
on net sales. Abbott will also be responsible for conducting clinical trials,
obtaining regulatory approval for and manufacturing, marketing, distributing,
and selling the products covered by the arrangement. In addition, Abbott made
a $3 million equity investment in the Company in 1996 whereby it purchased
500,000 shares of Series C Preferred Stock which converted into 357,143 shares
of Common Stock upon the Company's initial public offering.
The Company conducted research on the single use glucose monitoring
product through the third quarter of 1998. At that point in time that research
work was transferred to Abbott. Abbott is currently conducting a research
program for single use glucose monitoring that is focused on the collection
of interstitial fluid. The focus of that research is to produce methodologies
that will permit collection of interstitial fluid at a minimum volume level,
and within a specified time, on a universal basis within the target diabetic
population. Once the research and development related to the collection of
interstitial fluid is completed, it will be followed by the integration of the
Company's microporation technology and Abbott's disposable assay technology
into a prototype device. The Company expects prototype development to be
followed by clinical trials and a regulatory submission. Unexpected problems,
however, may arise during the development and regulatory approval processes.
In addition, Abbott retains a significant degree of discretion regarding the
timing of these activities and the amount and quality of financial, personnel
and other resources that it devotes to these activities. Accordingly, there
can be no assurance that these events will occur.
Continuous Glucose Monitoring Product
During the course of research and development of its single-use
interstitial fluid-based glucose monitoring product, the Company discovered an
application which allows for continuous monitoring of glucose. By applying a
constant state of low-level vacuum to an array of micropores, a stream of
interstitial fluid is produced. This stream of interstitial fluid may be passed
over a sensor which measures the glucose concentration periodically providing
the patient with multiple readings. Feasibility data generated by the company
indicates that an array of micropores may be kept viable for up to three days.
A second feasibility study showed that the concentration of interstitial fluid
glucose continued to correlate to the concentration of blood glucose.
The product concept of the continuous glucose monitoring product
consists of a disposable patch connected with an umbilical to a beeper-sized
meter. The patch would be placed over a small array of micropores created on
the body. This array could be placed in a number of locations, but the current
concept would have it placed on the torso. The patch would be designed to
eliminate spent interstitial fluid. The meter would be worn on a belt or
hidden under clothing. The system would collect a new glucose reading every
10 to 15 minutes which would be recorded by the meter and presented on the
meter's display. The stored information would be capable of being downloaded
for analysis. The meter would also indicate if the current reading is higher
or lower than any previous reading, showing a trend. The meter would also be
capable of indicating high or low glucose levels via an alarm. For
convenience, the umbilical would be detachable so that the patient may bathe
or engage in other activities, then reattach the umbilical and resume
monitoring.
SpectRx is currently conducting research to determine both technological and
commercial feasibility for a continuous monitoring approach to glucose
monitoring using interstitial fluid. After feasibility is determined,
engineering and other development activities will ensue. There can be no
assurance that feasibility will be achieved or that a commercial product will
result.
NON-INVASIVE CANCER DETECTION
Background
According to the American Cancer Society, cancer is a group of many
related diseases. All forms of cancer involve out-of-control growth and spread
of abnormal cells. Normal body cells grow, divide, and die in an orderly
fashion. Cancer cells, however, continue to grow and divide, and can spread to
other parts of the body. In America, half of all men and one-third of all women
will develop cancer during their lifetimes. According to the Society, the sooner
a cancer is found, and the sooner treatment begins, the better a patient's
chances are of a cure.
-8-
<PAGE> 9
Cervical Cancer
Cervical cancer is a cancer which begins in the lining of the cervix
(the lower part of the uterus) which may spread to other parts of the body if
left untreated. Cervical cancers form over time. There is generally a gradual
change from a normal cervix to cervix with precancer cells to cervical cancer.
For some women, precancerous changes may go away without any treatment. While
the majority of precancerous changes do not advance to cancer, if these
precancers are treated, true cancers can be prevented. The Pap smear, where a
sample of cervical tissue is placed on a slide and observed in a laboratory, is
the most common form of cervical cancer screening.
Cervical Cancer Market
The American Cancer Society estimates that during 1999, about 12,800
cases of invasive cervical cancer will be diagnosed in the United States.
Cervical cancer is the ninth most deadly cancer in the U.S. with 4,800 deaths
predicted in 1999. According to published data, cervical cancer results in
approximately 33,000 deaths annually worldwide with 437,000 new cases reported
each year.
The major market opportunities are in screening and diagnosis. Since
the introduction of better screening and diagnosis methods, the number of
cervical cancer deaths in the U.S. has declined dramatically. The main reason
for this change is the increased use of the Pap smear screening test. However
the Pap smear screening test has a wide variation in sensitivity (11% to 99%)
and specificity (14% to 97%), according to a meta-analysis of Pap test accuracy
published in the American Journal of Epidemiology, (Vol. 141, No. 7, 1995).
Approximately 55 million Pap tests are given annually in the U.S. and Europe.
The average price of a Pap test in the U.S. is $26.
The standard for cervical cancer diagnosis, after screening, is a
visual examination of the cervix using a Colposcope followed by a biopsy. This
method looks for visual morphological changes attributable to cancer. There are
approximately two million Colposcope examinations annually in the U.S. and
Europe. The average cost of a Colposcope examination in the U.S. is $185.
Non-invasive Cervical Cancer Product
The Company, in collaboration with Welch Allyn, is developing a
non-invasive cervical cancer detection product. The product is based on
SpectRx's proprietary biophotonic technology and will be designed to identify
cancers and precancers painlessly, non-invasively and at the point of care by
shining light onto the cervix, then analyzing the light reflected from the
cervix. The information presented by the reflected light will be used to produce
a map or image of diseased tissue. Consequently, this test, unlike the Pap smear
test or biopsy, preserves the perspective and positional information of disease
on the cervix, allowing for more accurate diagnosis. The SpectRx/Welch-Allyn
product, in addition to detecting the morphological changes, is also expected to
detect the biochemical changes that precede the development of visual lesions.
In this way the cancer is detected early in its development thereby increasing
the chances of effective treatment. The product will incorporate a calibration
disposable.
The Company is currently conducting human clinical feasibility studies
of a laboratory prototype at two hospitals and expects to publish data in the
fall of 1999. The Company expects prototype development to be followed by
clinical trials and a regulatory submission. Unexpected problems, however, may
arise during the development and regulatory approval processes. In addition,
Welch Allyn retains a significant degree of discretion regarding the timing of
these activities and the amount and quality of financial, personnel and other
resources that it devotes to these activities. Accordingly, there can be no
assurance that these events will occur.
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
-9-
<PAGE> 10
collaborative arrangements with leading medical device companies. The Company
has been successful in its history in developing such strategic relationships.
The Company currently has collaborative arrangements with Abbott, Roche
Diagnostics BMC, Respironics and Welch Allyn. The Company is, to varying
degrees, dependent upon its collaborative partners for the development, clinical
testing, regulatory approval, manufacturing, and commercialization of its
products.
Respironics (Healthdyne Technologies, Inc.)
In June 1996, SpectRx entered into a Purchasing and Licensing
Agreement with Healthdyne Technologies, Inc., which was later acquired by
Respironics (the "Respironics Agreement"). This agreement was amended October
21, 1998. Pursuant to the Respironics Agreement, Respironics is responsible for
clinical trials, the regulatory approval process and sale of the BiliChek(TM)
in the United States and Canada. The Company retains manufacturing rights and is
responsible for the regulatory approval process and sale of the infant jaundice
product outside of the United States and Canada. Under the Respironics
Agreement, the Company receives from Respironics licensing fees and a
manufacturing profit on products sold to Respironics and shares any profit from
the sales of disposables by Respironics. Respironics receives an exclusive
license for the United States and Canada (i) to use and sell instruments for
non-invasive bilirubin measurement ("Instruments"), (ii) to use and sell
disposable probes, tips or other devices which, when used with Instruments,
measure bilirubin levels ("Disposables") and items accessory to and not
necessary for the operation of Instruments or Disposables ("Accessories"), and
(iii) to make Instruments, Disposables and/or Accessories (collectively,
"Licensed Products"). Unless SpectRx is unable to supply Licensed Products,
Respironics must purchase its requirements for Licensed Products from SpectRx.
Respironics has agreed to pay SpectRx's cost for manufacturing each Licensed
Product. Respironics and SpectRx then share equally the margin earned on the
sale of Licensed Products. In order to maintain license exclusivity, Respironics
has agreed to purchase from SpectRx certain minimum amounts of Licensed Products
or pay a royalty to SpectRx for an equivalent number of Licensed Products. In
the event that SpectRx is unable to supply Licensed Products, Respironics
receives a license to manufacture the Licensed Products and pays a royalty to
SpectRx on sales of Licensed Products.
SpectRx has granted to Respironics the exclusive option to acquire an
exclusive license for the United States and Canada, on terms substantially
similar to those contained in the Respironics Agreement, with respect to any new
intellectual property that comes into existence after the effective date of the
Respironics Agreement, which covers devices that would compete, directly or
indirectly, with the Licensed Products and for which SpectRx has the right and
authority to grant licenses. In such event, Respironics has agreed to reimburse
SpectRx for one-half of SpectRx's cost to develop and commercialize such
product, in lieu of paying any license fees. If Respironics fails to exercise
such option, SpectRx may license such intellectual property to any third party
on terms no more favorable than those offered to Respironics.
The Respironics Agreement remains in effect for the longer of fifteen
years or until the expiration date of the last licensed patent to expire. Upon
expiration of the Respironics Agreement, Respironics has the option to renew the
Respironics Agreement for additional fifteen year terms indefinitely.
Respironics also has the right to terminate the Respironics Agreement without
cause upon not less than 30 days' written notice to the Company.
Roche Diagnostics Boehringer Mannheim
In December 1994, SpectRx entered into a Development and License
Agreement (the "Development Agreement") with Boehringer Mannheim Corp. (which
has since merged with Roche Diagnostics) with respect to a non-invasive
instrument that measures changes in the lens of the human eye for the purpose of
detecting diabetes. Pursuant to the Development Agreement, SpectRx has granted
to Roche Diagnostics BMC an exclusive, worldwide license to sell and market the
Company's diabetes screening product. SpectRx receives development milestone
payments from Roche Diagnostics BMC pursuant to the Development Agreement. The
Development Agreement remains exclusive for so long as Roche Diagnostics BMC
meets certain minimum volume purchase requirements set forth in the Supply
Agreement with Roche Diagnostics BMC (discussed below). The Development
Agreement may be terminated at any time by Roche Diagnostics BMC upon written
notice to SpectRx.
-10-
<PAGE> 11
In January 1996, Roche Diagnostics BMC and SpectRx entered into a
Supply Agreement for the supply by SpectRx to Roche Diagnostics BMC of the
Company's diabetes screening product (the "Supply Agreement"). Roche Diagnostics
BMC's purchase price for the Company's diabetes screening product is calculated
pursuant to a formula based on a gross margin. Roche Diagnostics BMC is required
to meet minimum annual purchase requirements for the diabetes screening product
each year or Roche Diagnostics BMC forfeits its exclusivity under the marketing
license granted in the Development Agreement. The term of the Supply Agreement
is coincident with the term of the Development Agreement. Roche Diagnostics BMC
may terminate the Supply Agreement for material breach (including a failure to
supply adequate requirements) of the agreement by the Company, which breach
remains unremedied for 30 days after notice to the Company and in which case
Roche Diagnostics BMC is deemed to have acquired a manufacturing license under
the Development Agreement. If Roche Diagnostics BMC acquires this manufacturing
license, it must pay royalties to SpectRx on Roche Diagnostics BMC sales of the
diabetes screening product. During the term of the Supply Agreement, SpectRx
cannot enter into any agreement to develop or manufacture a non-invasive
diabetes detection instrument using the same or similar technology as used in
the Company's diabetes screening product other than with Roche Diagnostics BMC
affiliates. Roche Diagnostics BMC is not restricted from pursuing the
development of a diabetes screening instrument with another party.
Abbott Laboratories
In October 1996, SpectRx entered into a Research & Development and
License Agreement (the "Abbott Agreement") with Abbott for the development and
commercialization of the Company's glucose monitoring technology in the field of
extracting interstitial fluid samples for glucose monitoring (the "Field").
Pursuant to the Agreement, SpectRx has granted to Abbott a worldwide license
under its patents, patent applications and know how (the "Technology") useful in
the Field, including improvements, to manufacture and sell products in the
Field. The license is exclusive in all countries except Singapore and the
Netherlands where the license is non-exclusive. Abbott also has certain rights
of first negotiation with the Company regarding any rights the Company may have
to license the Technology for the development and commercialization of other
products relating to the measurement of analytes in interstitial fluid and the
delivery of therapeutic agents based on such measurements. Under the Abbott
Agreement, SpectRx receives from Abbott development funding, payments on
achievement of milestones and a royalty on Abbott product sales. In addition,
Abbott made a $3 million equity investment in SpectRx in 1996 whereby it
purchased 500,000 shares of Series C Preferred Stock which converted into
357,143 shares of Common Stock upon the Company's initial public offering.
Abbott subsequently purchased SpectRx Common Stock on the open market and
currently owns 6.2% of the outstanding Stock of the Company.
Under the Abbott Agreement, the parties agreed to jointly conduct a
research program designed to demonstrate that the Company's single use glucose
monitoring product can extract an adequate sample of interstitial fluid in a
targeted time period. The focus of that development activity has been toward a
single use product concept. During the joint development program, which began in
the fourth quarter of 1996, Abbott will pay mutually agreed development costs.
Abbott is currently conducting all research on means of extracting adequate
samples of interstitial fluid related to single use glucose monitoring
applications. After satisfactory demonstration of sample extraction within a
targeted time period, and if Abbott wishes to commercialize the product, it is
responsible for further product development and obtaining all required
regulatory approvals. After obtaining these regulatory approvals, Abbott is
required to diligently pursue the sales of the products but is not prohibited
from marketing competing products. If Abbott elects not to commercialize the
product, the agreement may be terminated by either party. Abbott has a fixed
period from the date of notice to the Company of its intention to commercialize
the product in which to complete commercialization and begin shipment of
products. If such commercialization has not been completed within the permitted
time, SpectRx may terminate the agreement. Abbott and SpectRx have been
negotiating since the third quarter of 1998 how and under what terms, the effort
to develop a continuous glucose monitoring product will be included in the
collaboration. Currently, SpectRx is conducting research outside of any joint
research program using its own funds.
Under the Abbott Agreement, all technology invented solely by SpectRx
during the joint development program is owned solely by SpectRx. All technology
invented solely by Abbott and all clinical data, regulatory filings and
government marketing approvals developed solely by Abbott are the property of
Abbott. On certain early
-11-
<PAGE> 12
termination events, SpectRx has a right to obtain a license to certain of the
relevant Abbott technology. Technology jointly invented during the joint
development program will be jointly owned pursuant to a royalty sharing
arrangement.
The Abbott Agreement remains in effect until the expiration of the
last licensed patent to expire. Abbott has the right to terminate the Abbott
Agreement without cause upon not less than 60 days' prior notice to the Company
at any time prior to the first shipment of products and upon not less than 120
days' prior notice to the Company thereafter. If Abbott terminates without cause
after completion of the joint development program but before the first product
is shipped, Abbott must pay to the Company a one time development program
milestone payment. Abbott may terminate the Abbott Agreement upon not less than
30 days' prior notice to the Company for certain product development failures or
failure to obtain key patent protection.
Welch Allyn
In December 1998, SpectRx entered into a Development and Commercialization
Agreement with Welch Allyn, Inc. with respect to noninvasive cervical and skin
cancer diagnostic products. Under the terms of the agreement, the two companies
jointly share in the development costs for such products and also will jointly
share in the revenue produced by such products, if those products are developed
to commercialization. SpectRx can also receive certain milestone payments
pursuant to the agreement. The agreement further anticipates that both Welch
Allyn and SpectRx would manufacture portions of any commercialized products and
would collaborate in sales and marketing. Both SpectRx and Welch Allyn are
prohibited from pursuing development of devices, utilizing the technology
covered by the agreement, with another party while the collaboration remains in
effect. The agreement specifically focuses on the development of a cervical
cancer detection product. Should SpectRx determine through research efforts that
an application of the technology for the detection of skin cancer is feasible,
the agreement provides for, and retains certain rights for Welch Allyn to expand
the relationship with SpectRx to develop and commercialize a skin cancer
(melanoma) detection product.
Licensing Arrangements
Georgia Tech Research Corporation
The Company has a license agreement with Georgia Tech Research
Corporation ("GTRC") pursuant to which GTRC has granted the Company an
exclusive, worldwide license (including the right to grant sublicenses) to make,
use and sell products that incorporate GTRC's know how related to a method of
using non-invasive instrumentation to quantitatively measure molecular changes
in living human lenses for the purposes of diagnosing diabetes and
precataractous conditions (the "GTRC Agreement"). Under the license, the Company
must pay a royalty to GTRC on net sales of any such products manufactured and
sold by the Company. The term of the GTRC Agreement is until the expiration date
of the last expiring patent covering any of the technology licensed or, if no
patent issues, for 15 years from the date of execution of the GTRC Agreement.
Altea Technologies, Inc
In March 1996, SpectRx entered into a License and Joint Development
Agreement (the "Altea/Nimco Agreement") among the Company, Altea ("Altea") and
Non-Invasive Monitoring Company, Inc. ("Nimco") pursuant to which certain rights
in respect of jointly developed technology are allocated between the Company and
Altea. Both Altea and Nimco are jointly controlled by Jonathan Eppstein, a
former Vice President of the Company, and his sister. The Altea/Nimco Agreement
also covers one granted patent and know how related to the glucose monitoring
product, the joint application of the Company and Altea for a U.S. patent and an
international patent related to the glucose monitoring product, and provides for
continued joint development efforts between SpectRx and Altea as mutually
agreed. The Altea/Nimco Agreement further provides for the joint ownership by
SpectRx and Altea of certain patents and technology relating to the
transdermal/intradermal movement of substances utilizing various methods. Under
the Altea/Nimco Agreement, SpectRx receives worldwide, exclusive rights to any
technology for monitoring applications covered by the Nimco patents and related
joint technology and Altea receives exclusive, worldwide rights to any
technology for delivery applications covered by the joint technology. Future
inventions made by each of SpectRx and
-12-
<PAGE> 13
Altea based on newly developed technology related to the licensed technology are
included within the Altea/Nimco Agreement.
SpectRx is obligated to pay royalties to Nimco for products using its
technology and to Altea for products using its technology, in each case based on
net sales of products and net revenues from sublicensees. Royalties on products
using both Nimco and Altea technology will be allocated as mutually agreed.
Minimum annual royalties are payable by SpectRx to Altea. See Note 9 of Notes to
Consolidated Financial Statements. If actual accrued royalties are less than the
minimum royalty amount, SpectRx may pay Altea the difference or the license will
become non-exclusive. Thereafter, SpectRx must offer a right of first refusal to
acquire exclusive rights to the monitoring technology to Altea.
The term of the Altea/Nimco Agreement is for the life of the patents
covered by the agreement. The agreement may be terminated by any party in the
event of a default by any other party that is not cured within 90 days of notice
to the defaulting party. The agreement may be terminated globally by Altea if
SpectRx fails to commercialize any product, use or application utilizing the
monitoring technology in any major country by the date of the first commercial
shipment date under the Abbott Agreement and may be terminated by Altea with
respect to certain regions if SpectRx fails to commercialize any product, use or
application in those regions by this date. SpectRx may terminate the agreement
upon not less than three months prior notice to Altea and Nimco if given before
it has commercialized the technology and upon not less than six months prior
notice to each party if given after commercialization has commenced. Except in
the case of termination of the agreement by SpectRx for breach, upon termination
all technology and joint technology shall become the exclusive property of
Altea, except the Nimco patents. If the agreement is terminated by SpectRx for
breach, all rights to the monitoring technology in the countries in which
SpectRx has retained its exclusive rights shall become the exclusive property of
SpectRx, each party shall retain non-exclusive rights to the monitoring
technology in other countries, and Altea shall retain all rights to the delivery
technology. If SpectRx loses its rights to the monitoring technology for failure
to commercialize (but not due to breach), Altea and Nimco, after their
reacquisition of rights from SpectRx, will pay an amount of money by way of a
royalty to SpectRx according to a formula to reflect each party's relative
investment.
The University of Texas M.D. Anderson Cancer Center
In March 1996, SpectRx, entered into a Patent License Agreement with
the Board of Regents (the "Board") of the University of Texas System and M.D.
Anderson pursuant to which the Board granted SpectRx an exclusive license under
certain of its patents to manufacture, have manufactured, use and sell products
within the United States for use within the licensed field of optical
measurement of bilirubin in human tissue (the "MDA Patent License Agreement").
SpectRx has the right to assign this license to affiliates and the right to
sublicense the foregoing rights. In connection with the MDA Patent License
Agreement, SpectRx has agreed to pay all expenses incurred in prosecuting and
maintaining the patents licensed and a royalty on net sales of products that
incorporate the licensed patents, subject to annual minimum royalty payments.
See Note 9 of Notes to Consolidated Financial Statements. The term of the MDA
Patent License Agreement is until the expiration date of the last expiring
patent licensed. The Board has the right at any time after one year from the
effective date of the MDA Patent License Agreement to terminate the license if
SpectRx, within 90 days after written notice from the Board, fails to provide
written evidence satisfactory to the Board that SpectRx has commercialized or is
actively and effectively attempting to commercialize an invention licensed under
the MDA Patent License Agreement.
Joseph Lakowicz, Ph.D.
The Company has a license agreement with Joseph Lakowicz, Ph.D.
whereby Dr. Lakowicz has granted the Company an exclusive, worldwide license
(including the right to grant sublicenses) to make, use, and sell medical
products that incorporate Dr. Lakowicz's intellectual property related to
lifetime fluorescence technology (the "Lakowicz Agreement"). The intellectual
property consists of a portfolio of granted patents, patent applications and
foreign filings in the area of lifetime fluorescence technology. The Company has
agreed to pay a royalty to Dr. Lakowicz on net sales of such products
manufactured and sold. Additionally, the Company is committed to fund certain
research programs under the direction of Dr. Lakowicz. See Note 9 of Notes to
Consolidated Financial Statements, which includes these funding commitments. The
Company has sublicensed some parts of this intellectual property related to
invasive blood
-13-
<PAGE> 14
tests to its subsidiary, FluorRx, Inc. The term of the Lakowicz Agreement is
until the expiration date of the last expiring patent covering any of the
technology licensed.
RESEARCH, DEVELOPMENT AND ENGINEERING
To date, the Company has been engaged primarily in the research,
development and testing of the Company's glucose monitoring, diabetes screening,
infant jaundice and cancer detection products, including research for and
development of its core electro-optical and microporation technologies. Since
inception to December 31, 1998, the Company incurred approximately $12.1 million
in research and development expenses, net of approximately $3.6 million which
was reimbursed through collaborative arrangements. Three distinct groups within
the Company conduct research, development and engineering. One group consists of
23 engineers and support personnel who design optics, electronics, mechanical
components and software for the infant jaundice and diabetes screening products.
A second group consists of 12 scientists and engineers who devote their time to
the development of microporation technology for the monitoring of glucose and
other analytes. The third group consists of 10 scientists and engineers focused
on the development of cancer detection products.
The Company believes that the interstitial fluid sampling technology
under development at SpectRx and Abbott for use in connection with the Company's
glucose monitoring product may also be used to develop alternatives for certain
blood tests where the analyte being tested is also present in comparable volumes
in interstitial fluid. Abbott has a right of first negotiation with the Company
regarding the use of interstitial fluid sampling technology for these
applications.
In 1996, SpectRx executed a licensing agreement with Dr. Lakowicz of
the University of Maryland pursuant to which the Company licenses a portfolio of
intellectual property related to lifetime fluorescence technology, a technology
used to determine the spectroscopic fingerprint of a substance. The Company
believes lifetime fluorescence technology may have applications including in
vitro blood chemistry, molecular diagnostics, flow cytometry, combinatorial
chemistry for pharmaceutical discovery research and noninvasive optical
diagnostics.
To date, the Company has only tested prototypes of its glucose
monitoring and cancer 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 glucose monitoring and cancer detection products are produced.
The company is developing the pre-production prototypes and beginning its
ramp-up for production of the diabetes screening device. While significant
progress has been made in development and engineering, considerable additional
effort and expense will be required before a commercial device is shipped.
MANUFACTURING
One element of the Company's business strategy is to manufacture
certain of its products and to outsource the production of other, high volume
products and associated disposables. To date, the Company's manufacturing
activities have consisted of building certain prototype devices, developing
production infrastructure and building production versions of its BiliChek(TM)
and BiliCal(TM) products. If the Company successfully develops its diabetes
screening product and, together with Roche Diagnostics BMC obtains FDA clearance
and other regulatory approvals to market this product, the Company will
undertake to manufacture both of these products in commercial quantities. The
Company has little experience manufacturing such products in the volumes that
would be necessary for the Company to achieve significant commercial sales.
Currently 13 individuals are employed by the Company to accomplish the
production planning, quality system management, facility development, and
production scaling that will be needed to bring production to commercial levels.
The Company announced in 1998 that it had received ISO 9001/EN46001 and CE mark
Certification. These approvals enabled the Company to commence production of its
BiliChek(TM) and BiliCal(TM) products and to begin shipment of these products
into markets for which it has received regulatory clearance.
SALES, MARKETING AND DISTRIBUTION
The Company has elected to focus most of the sales and distribution of
its current products through its collaborative partners. The Company believes
that by aligning with larger, more established partners, in specific market
-14-
<PAGE> 15
segments, it can utilize its partners' already developed strengths and more
effectively and quickly penetrate the market place. The Company's primary
efforts to date have been to build the skill and information base to identify
and quantify market segments to which the Company's technologies can be
economically developed and marketed, and to launch the BiliChek(TM) product
system.
The Company has developed the BiliChek(TM) and BiliCal(TM) marketing
and distribution program to an introductory stage. SpectRx has developed
packaging, advertising, display materials, and training, and has, in addition,
signed distribution agreements or is in negotiation with companies it believes
to be highly experienced in the neonatal markets that SpectRx is targeting in
Europe, Asia and South America. The Company has also added or engaged marketing
personnel to develop and execute the programs necessary to launch the
BiliCheck(TM) system and to manage sales of these products. The Company launched
its products in markets outside the U.S. and Canada in April 1998 and began
introductory programs during the remainder of 1998. Nevertheless, significant
volumes of these products have not yet been shipped and the efficacy of the
marketing programs or the distributors has not yet been tested with SpectRx's
products.
Respironics has the exclusive right to market and sell the Company's
infant jaundice product in the United States and Canada. Abbott has the
exclusive right to market and sell the Company's glucose monitoring product in
all countries except Singapore and the Netherlands, where the license is
non-exclusive. Roche Diagnostics BMC has the exclusive worldwide right to market
and sell the Company's diabetes screening product. It is anticipated that Welch
Allyn and SpectRx will jointly manage the sales and marketing of any cancer
products that are developed.
PATENTS
The Company has pursued a strategy of developing and acquiring patents
and patent rights and licensing 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 Nimco one granted patent and know-how related to its glucose monitoring
product, jointly applied with 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 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 Roche Diagnostics BMC
pursuant to the Company's collaborative arrangement with Boehringer Mannheim.
The Company has license agreements with 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 Dr. Joseph Lakowicz 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.
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
-15-
<PAGE> 16
compete with other providers of personal glucose monitors, diabetes screening
tests, infant jaundice and cancer products.
A number of competitors, including Johnson & Johnson, Inc. (which owns
Lifescan, Inc.), Roche Diagnostics BMC, 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.
There is also competition in the diabetes screening and infant
jaundice markets. The existing blood test providers, companies that produce
blood tests and other technologies that could replace blood testing will compete
for a share of these markets. Competition in cancer detection is also intense.
Current screening systems, primarily the Pap smear and colposcopy, are well
established and pervasive. The Company will be required, in conjunction with
Welch Allyn, to develop devices that are more accurate, easier to use or less
costly to administer, such that these devices have a competitive advantage to be
commercially successful. In addition to existing external competitors, SpectRx's
partner, Welch Allyn, is currently a competitor in the colposcopy market.
GOVERNMENT REGULATION
All of the Company's products are regulated as medical devices.
Medical device products are subject to rigorous FDA and other governmental
agency regulations in the United States and may be subject to regulations of
relevant foreign agencies. The FDA regulates the clinical testing, manufacture,
labeling, packaging, marketing, distribution and record keeping for such
products in order to ensure that medical products distributed in the United
States are safe and effective for their intended uses. Noncompliance with
applicable requirements can result in import detentions, fines, civil penalties,
injunctions, suspensions or losses of regulatory approvals or clearances, recall
or seizure of products, operating restrictions, refusal of the government to
approve product export applications or allow the Company to enter into supply
contracts, and criminal prosecution. Failure to obtain regulatory approvals, the
restriction, suspension or revocation of regulatory approvals or clearances, if
obtained, or any other failure to comply with regulatory requirements would have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Clinical Chemistry Branch of the FDA's Division of Clinical
Laboratory Devices (the "Branch") has traditionally been the reviewing branch
for blood-based personal glucose monitoring products. The Clinical Chemistry and
Clinical Toxicology Devices Panel (the "Panel") is an external advisory panel
that provides advice to the Branch regarding devices that are reviewed by the
Branch. The panel meets from time to time and provides comments on testing
guidelines. 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.
In the United States, medical devices are classified into one of three
classes (Class I, II or III), on the basis of the controls deemed necessary by
the FDA to reasonably assure their safety and effectiveness. Under FDA
regulations, Class I devices are subject to general controls (for example,
labeling, premarket notification and adherence to GMP), and Class II devices are
subject to general and special controls (for example, performance standards,
postmarket surveillance, patient registries, and FDA guidelines). Generally,
Class III devices are those which must receive premarket approval from the FDA
to ensure their safety and effectiveness (for example, life-sustaining,
life-supporting and implantable devices, or new devices which have not been
found substantially equivalent to legally marketed Class I or II devices).
A medical device manufacturer may seek clearance to market a medical
device by filing a 510(k) premarket notification with the FDA if a medical
device manufacturer establishes that a newly developed device is "substantially
equivalent" to either a device that was legally marketed prior to May 28, 1976,
the date upon which the Medical Device Amendments of 1976 were enacted, or to a
device that is currently legally marketed and has received 510(k) premarket
clearance from the FDA. The 510(k) premarket notification must be supported by
appropriate information, including, where appropriate, data from clinical
trials, establishing the claim of substantial equivalence to the satisfaction of
the FDA. Commercial distribution of a device for which a 510(k) premarket
notification is required can begin only after the
-16-
<PAGE> 17
FDA issues an order finding the device to be "substantially equivalent" to a
predicate device. The FDA has recently been requiring a more rigorous
demonstration of substantial equivalence than in the past. It generally takes
from four to 12 months from the date of submission to obtain clearance of a
510(k) submission, but it may take substantially longer. The FDA may determine
that a proposed device is not substantially equivalent to a legally marketed
device, or that additional information is needed before a substantial
equivalence determination can be made. The Company believes that its products
will qualify for 510(k) premarket notification.
A "not substantially equivalent" determination, or a request for
additional information, could delay the market introduction of new products that
fall into this category and could have a material adverse effect on the
Company's business, financial condition and results of operations. For any of
the Company's products that are cleared through the 510(k) process,
modifications or enhancements that could significantly affect the safety or
efficacy of the device or that constitute a major change to the intended use of
the device will require new 510(k) submissions or approval of a PMA application.
Any modified device for which a new 510(k) premarket notification is required
cannot be distributed until 510(k) clearance is obtained for the modified
device. There can be no assurance that the Company will obtain 510(k) clearance
in a timely manner, if at all, for any devices or modifications to devices for
which it may submit a 510(k) notification.
A PMA application must be submitted if a proposed device is not
substantially equivalent to a legally marketed Class I or Class II device, or
for a Class III device for which FDA has called for PMAs. The PMA application
must contain valid scientific evidence to support the safety and effectiveness
of the device which includes the results of clinical trials, all relevant bench
tests, and laboratory and animal studies. The PMA application must also contain
a complete description of the device and its components, and a detailed
description of the methods, facilities and controls used for manufacture,
including, where appropriate, the method of sterilization and its assurance. In
addition, the submission must include proposed labeling, advertising literature
and training methods (if required). If human clinical trials of a device are
required in connection with a PMA application, and the device presents a
"significant risk," the sponsor of the trial (usually the manufacturer or the
distributor of the device) is required to file an investigational device
exemption ("IDE") application prior to commencing human clinical trials. The IDE
application must be supported by data, typically including the results of animal
and laboratory testing, and a description of how the device will be
manufactured. If the IDE application is reviewed and approved by the FDA and one
or more appropriate institutional review boards ("IRBs"), human clinical trials
may begin at a specific number of investigational sites with a specific number
of patients, as approved by the FDA. If the device presents a "nonsignificant
risk" to the patient, a sponsor may begin clinical trials after obtaining
approval for the study by one or more appropriate IRBs, but FDA approval for the
commencement of the study is not required. Sponsors of clinical trials are
permitted to sell those devices distributed in the course of the study provided
such compensation does not exceed recovery of costs of manufacture, research,
development and handling. An IDE supplement must be submitted to and approved by
FDA before a sponsor or an investigator may make a significant change to the
investigational plan that may affect the plan's scientific soundness or the
rights, safety or welfare of human subjects.
Upon receipt of a PMA application, the FDA makes a threshold
determination as to whether the application is sufficiently complete to permit a
substantive review. If the FDA determines that the PMA application is
sufficiently complete to permit a substantive review, the FDA will accept the
application for filing. An incomplete application will be returned to the
sponsor and must be resubmitted and accepted for filing before the application
will be substantively reviewed. Once the submission is accepted for filing, the
FDA begins an in-depth review of the PMA application. An FDA review of a PMA
application generally takes one to two years from the date the PMA application
is accepted for filing, but may take significantly longer. The review time is
often significantly extended by the FDA asking for more information or
clarification of information already provided in the submission. During the PMA
application review period, the submission may be sent to an FDA-selected
scientific advisory panel composed of physicians and scientists with expertise
in the particular field. The FDA scientific advisory panel issues a
recommendation to the FDA that may include conditions for approval. The FDA is
not bound by the recommendations of the advisory panel. Toward the end of the
PMA application review process, the FDA will conduct an inspection of the
manufacturer's facilities to ensure that the facilities are in compliance with
applicable GMP requirements.
If the FDA evaluations of both the PMA application and the
manufacturing facilities are favorable, the FDA will issue an approvable letter,
which usually contains a number of conditions which must be met in order to
secure final
-17-
<PAGE> 18
approval of the PMA application. When those conditions have been fulfilled to
the satisfaction of the FDA, the agency will issue a PMA application approval
letter authorizing commercial marketing of the device for certain indications
and intended uses. The PMA application review process can be expensive,
uncertain and lengthy. A number of devices for which a PMA has been sought have
never been approved for marketing. The FDA may also determine that additional
clinical trials are necessary, in which case the PMA may be significantly
delayed while such trials are conducted and data is submitted in an amendment to
the PMA application. Modifications to the design, labeling or manufacturing
process of a device that is the subject of an approved PMA application, its
labeling, or manufacturing process may require approval by the FDA of PMA
supplements or new PMA applications. Supplements to a PMA often require the
submission of the same type of information required for an initial PMA, except
that the supplement is generally limited to that information needed to support
the proposed change from the product covered by the original PMA. The FDA
generally does not call for an advisory panel review for PMA supplements. There
can be no assurance that, if required, the Company will be able to meet the
FDA's PMA requirements or that any necessary approvals will be received. Failure
to comply with regulatory requirements would have a material adverse effect on
the Company's business, financial condition and results of operations.
Regulatory approvals and clearances, if granted, may include
significant labeling limitations and limitations on the indicated uses for which
the product may be marketed. In addition, to obtain such approvals and
clearances, the FDA and certain foreign regulatory authorities impose numerous
other requirements with which medical device manufacturers must comply. FDA
enforcement policy strictly prohibits the marketing of approved medical devices
for unapproved uses. Any products manufactured or distributed by the Company
pursuant to FDA clearances or approvals are subject to pervasive and continuing
regulation by the FDA. The FDA also requires the Company to provide it with
information on death and serious injuries alleged to have been associated with
the use of the Company's products, as well as any malfunctions that would likely
cause or contribute to death or serious injury. Failure to comply with
applicable regulatory requirements can result in, among other things, warning
letters, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, refusal by the government to grant
premarket clearance or premarket approval for devices, withdrawals of approvals
and criminal prosecutions.
The Company is required to register with the FDA as a device
manufacturer and list its products with the Agency. The Company also is subject
to biannual inspections, for compliance with GMP, by the FDA and state agencies
acting under contract with the FDA. The GMP regulations require that the Company
manufacture its products and maintain its documents in a prescribed manner with
respect to manufacturing, testing, quality assurance and quality control
activities. The FDA also has promulgated final regulatory changes to the GMP
regulations that require, among other things, design controls and maintenance of
service records, and which will increase the cost of complying with GMP
requirements.
Labeling and promotional activities are subject to scrutiny by the FDA
and in certain instances, by the Federal Trade Commission. The FDA actively
enforces regulations prohibiting marketing of products for unapproved users. The
Company and its products are also subject to a variety of state and local laws
and regulations in those states and localities where its products are or will be
marketed. Any applicable state or local regulations may hinder the Company's
ability to market its products in those states or localities. Manufacturers are
also subject to numerous federal, state and local laws relating to such matters
as safe working conditions, manufacturing practices, environmental protection,
fire hazard control and disposal of hazardous or potentially hazardous
substances. There can be no assurance that the Company will not be required to
incur significant costs to comply with such laws and regulations now or in the
future or that such laws or regulations will not have a material adverse effect
upon the Company's ability to do business.
International sales of the Company's products are subject to the
regulatory requirements of each target country. The regulatory review process
varies from country to country. The ISO 9000 series of standards for quality
operations have been developed to ensure that companies know the standards of
quality to which they must adhere to receive certification. The European Union
has promulgated rules which require that medical products received by mid-1998
the right to affix the CE mark, an international symbol of adherence to quality
assurance standards and compliance with applicable European medical device
directives. The ISO 9001 certification was one of the CE mark certification
requirements required by mid-1998. The Company currently has ISO 9001/EN46001
certification. Failure however to maintain the right to affix the CE mark would
prohibit the Company from selling its products in member countries of the
European Union.
-18-
<PAGE> 19
The Company will rely upon its corporate partners to obtain certain
United States and foreign regulatory approvals and if such approvals are
obtained the Company will rely upon its corporate partners to remain in
compliance with ongoing 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.
EMPLOYEES AND CONSULTANTS
As of December 31, 1998, the Company had 57 employees and consulting
or other contract arrangements with 25 additional persons to provide services to
the Company on a full- or part-time basis. Of the 82 people so employed or
engaged by the Company, 45 are engaged in research and development activities,
11 are engaged in sales and marketing activities, 5 are engaged in regulatory
affairs and quality assurance, 13 are engaged in manufacturing and development,
and 8 are engaged in administration and accounting. No employees are covered by
collective bargaining agreements, and the Company believes it maintains good
relations with its 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. 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,
marketing, 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.
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 released for sale one product line. For the
remainder of its expected products, the company has only tested prototypes and
pre-release production versions of its products. Because the Company's research
and clinical development programs are at an early stage, substantial additional
research and development and clinical trials will be necessary before commercial
prototypes of the Company's other products are produced. The Company could
encounter unforeseen problems in the development of those 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 all 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.
-19-
<PAGE> 20
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.
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) 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, (ii) Roche Diagnostics BMC under which
Roche Diagnostics BMC has significant responsibility for undertaking or funding
the development, clinical testing, regulatory approval process and sale of the
Company's diabetes screening product, (iii) 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 and (iv) Welch Allyn which is a cooperative
development program in the early stages of determining product feasibility for a
cervical cancer detection product. The agreements evidencing these collaborative
arrangements grant a substantial amount of discretion to each of Abbott, Roche
Diagnostics BMC, Respironics and Welch Allyn. For example, each of these
collaborative partners may terminate their respective collaborative arrangements
with the Company effective upon the expiration of certain notice periods. In
addition, the obligation of each of the Company's collaborative partners to fund
or undertake the development, clinical testing, regulatory approval process,
marketing, distribution and/or sale of the products covered by their respective
collaborative arrangements with the Company is, to a large extent, dependent
upon the satisfaction of certain goals or "milestones" by certain specified
dates, some of which are outside the Company's control. To the extent that the
obligations of the Company's collaborative partners to fund or undertake all or
certain of the foregoing activities are not contingent upon the satisfaction of
certain goals or milestones, the collaborative partners nevertheless retain a
significant degree of discretion regarding the timing of these activities and
the amount and quality of financial, personnel and other resources that they
devote to these activities. Furthermore, there can be no assurance that disputes
will not arise between the Company and one or more of its collaborative partners
regarding their respective rights and obligations under the collaborative
arrangements. Finally, there can be no assurance that one or more of the
Company's collaborative partners will not be 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.
-20-
<PAGE> 21
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 December 31, 1998, the Company
had an accumulated deficit of approximately $18.8 million. To date, the Company
has engaged primarily in research and development efforts. The Company has only
generated limited revenues from product sales and does not have significant
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 2000 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 FDA. The
Company intends to seek clearance to market each of its products, where possible
through a 510(k) premarket notification supported by clinical data. A 510(k)
premarket notification has been filed with and approved by the FDA, for
clearance to market the Company's infant jaundice product. A 510(k)premarket
notification has also been filed with the FDA for clearance to market the
Company's diabetes screening product, however approval has not been received.
The Company has not filed any other 510(k) premarket notification for clearance
with the FDA. The Company expects 510(k) premarket notifications for clearance
to market its diabetes screening product in 1999. A 510k for the glucose
monitoring product is expected 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. Preliminary expectations regarding the Company's cancer
program are that those filings could be a PMA. 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.
-21-
<PAGE> 22
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
certification and CE mark certification, which is an international symbol of
quality and compliance with applicable European medical device directives. While
the Company has received ISO 9001 and CE mark certification, it must maintain
its certifications in future periods. Failure to receive or maintain ISO 9001 or
CE mark certification or other foreign regulatory approvals could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will obtain
any other required regulatory registrations or approvals in such countries or
that it will not be required to incur significant costs in obtaining or
maintaining such regulatory registrations or approvals. Delays in obtaining any
registrations or approvals required to market the Company's products, failure to
receive these registrations or approvals, or future loss of previously obtained
registrations or approvals could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company and its collaborative partners will be required to adhere
to applicable FDA regulations regarding Good Manufacturing Practice ("GMP") and
similar regulations in other countries, which include testing, control, and
documentation requirements. Ongoing compliance with GMP and other applicable
regulatory requirements will be strictly enforced in the United States through
periodic inspections by state and federal agencies, including the FDA, and in
foreign jurisdictions by comparable agencies. Failure to comply with applicable
regulatory requirements could result in, among other things, warning letters,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, refusal of the government to grant premarket
clearance or premarket approval for devices, withdrawal of approvals previously
obtained and criminal prosecution. The restriction, suspension or revocation of
regulatory approvals or any other failure to comply with regulatory requirements
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Clinical Chemistry Branch of the FDA's Division of Clinical
Laboratory Devices (the "Branch") has traditionally been the reviewing branch
for blood-based personal glucose monitoring products. The Clinical Chemistry and
Clinical Toxicology Devices Panel (the "Panel") is an external advisory panel
that provides advice to the Branch regarding devices that are reviewed by the
Branch. The panel meets from time to time and provides comments to the Branch
regarding guidelines. 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.
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 Roche Diagnostics BMC pursuant to the Company's
collaborative arrangement with Boehringer Mannheim. The Company has license
agreements with the
-22-
<PAGE> 23
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.
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.
Royalty Rates and Manufacturing Profits
The majority 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
-23-
<PAGE> 24
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 on some of its products are not likely to increase
over time because the royalty rates and manufacturing profit rates on those
products 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 be less. 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 collaboration with Welch Allyn is a joint development and
commercialization effort. It is anticipated that both SpectRx and Welch Allyn
would manufacture portions of the cancer detection device and both would share
in the revenues of products sold to customers. There can be no assurance,
however, that the Company, together with Welch Allyn, will sell sufficient
volumes of these products to generate substantial revenues.
Uncertainty of Market Acceptance
The Company's products are based upon new methods of glucose
monitoring, diabetes screening, infant jaundice monitoring and screening and
cervical cancer detection. 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 or other 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 in which the
company expects to offer products 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, infant
jaundice and cancer detection products.
A number of competitors, including Johnson & Johnson, Inc. (which owns
Lifescan, Inc.), Roche Diagnostics BMC, 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.
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
-24-
<PAGE> 25
against these and other competitors. In addition, there can be no assurance that
the Company's glucose monitoring, diabetes screening, infant jaundice or cancer
detection 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, infant jaundice
monitoring and cancer detection. 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 only included its
BiliChek(TM) and BiliCal(TM) products on a limited scale. If the Company
successfully develops its diabetes screening product and, together with Roche
Diagnostics BMC obtains FDA clearance and other regulatory approvals to market
that product, the Company will undertake to manufacture both of 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.
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
The Company is responsible for marketing its infant jaundice product
in countries other than the United Sates and Canada. The Company has relatively
limited experience in marketing or selling medical device products and only has
a six person marketing and sales staff. In order to successfully continue to
market and sell its infant jaundice
-25-
<PAGE> 26
product outside the United States and Canada, the Company must either develop a
marketing and sales force or expand its 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 fully develop a
marketing and sales force or that it will be able to enter into and maintain
marketing and sales agreements with third parties on acceptable terms. 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.
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,
Respironics and Welch Allyn, 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 12
months, but may not be sufficient to fund the Company's operations to the point
of commercial introduction of either its glucose monitoring product concepts.
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, patients, hospitals and physicians who purchase
medical devices such as the Company's products, generally rely on third-party
payors, principally federal Medicare, state Medicaid and private health
insurance plans, to reimburse them for all or a portion of the cost of the
medical device. Reimbursement for devices that have received FDA approval has
generally been available in the United States. In addition, certain health care
providers are
-26-
<PAGE> 27
gradually adopting a managed care system in which such providers contract to
provide comprehensive health care services for a fixed cost per person. The
Company is unable to predict what changes will be made in the reimbursement
methods utilized by third-party health care payors. Although the Company
anticipates that patients, hospitals and physicians will justify the use of the
Company's products by the attendant cost savings and clinical benefits that the
Company believes will be derived from the use of its products, there can be no
assurance that this will be the case. Furthermore, the Company could be
adversely affected by changes in reimbursement policies of governmental or
private health care payors. Any inability of patients, hospitals, physicians and
other users of the Company's products to obtain sufficient reimbursement from
health care payors for the Company's products or adverse changes in relevant
governmental policies or the policies of private third-party payors regarding
reimbursement for such products could have a material adverse effect on the
Company's business, financial condition and results of operations.
If the Company obtains the necessary foreign regulatory approvals,
market acceptance of the Company's products in international markets will be
dependent, in part, upon the availability of reimbursement within prevailing
health care payment systems. Reimbursement and health care payment systems in
international markets vary significantly by country and include both government
sponsored health care and private insurance. Although the Company intends to
seek international reimbursement approvals, there can be no assurance that such
approvals will be obtained in a timely manner, if at all. Any failure to receive
international reimbursement approvals could have an adverse effect on market
acceptance of the Company's products in the international markets in which such
approvals are sought.
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.
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, marketing, managerial and finance personnel.
The Company faces intense competition for qualified personnel in these areas,
many of whom are often subject to competing employment offers, and there can be
no assurance that the Company will be able to attract and retain such personnel.
The loss of key personnel or inability to hire and retain additional qualified
personnel in the future could have a material adverse effect on the Company's
business, financial condition and results of operations.
Control by Directors, Executive Officers and Affiliated Entities
The Company's directors, executive officers and entities affiliated
with them, in the aggregate, beneficially owned as of December 31, 1998
approximately 46% of the Company's outstanding Common Stock. These stockholders,
acting together, would be able to control substantially all matters requiring
approval by the stockholders of the Company, including the election of directors
and the approval of mergers and other business combination transactions.
Potential Volatility of Stock Price
The stock markets have experienced extreme price and volume
fluctuations that have substantially affected small capitalization medical
technology companies, resulting in changes in the market prices of the stocks of
many such companies that may not have been directly related to their operating
performance. Such broad market fluctuations may adversely affect the market
price of the Company's Common Stock. In addition, the market price of the Common
Stock
-27-
<PAGE> 28
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.
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.
-28-
<PAGE> 29
ITEM 2. PROPERTIES
The Company leases approximately 38,000 square feet in Norcross,
Georgia, which comprise the Company's administrative, research and development,
marketing and production facilities and the Company's planned manufacturing
facility. The Company's lease for the portion of this facility housing the
finance department and certain planned manufacturing operations extends through
1999, the portions housing certain research and development operations expire in
June 2000 and March 2003 and the portion housing administration, sales and
marketing, engineering and certain other planned manufacturing operations
expires in March 2001.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market
(ticker symbol SPRX). The number of record holders of the Company's Common Stock
at February 28, 1999 was 115.
The Company completed an initial public offering of 2,361,699 shares
of Common Stock in July 1997. Prior to the initial public offering, the
Company's Common Stock was not publicly traded.
The high and low last sales prices for the third and fourth quarters
of 1998 as reported by the Nasdaq National Market are as follows:
<TABLE>
<CAPTION>
1998
----------------------
HIGH LOW
------- -------
<S> <C> <C>
First Quarter $ 9.50 6.50
Second Quarter $ 10.00 $ 3.875
Third Quarter $ 6.875 $ 4.00
Fourth Quarter $ 7.00 $ 2.875
</TABLE>
The Company has not paid any dividends since its inception and does
not intend to pay any dividends in the foreseeable future.
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.
-29-
<PAGE> 30
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 December 31, 1998 (the Company's fiscal year end), the approximate amount of
net proceeds used were $4.2 million for the funding of the development of the
Company's infant jaundice and diabetes screening products, $3.1 million for
developing production capacity and increasing inventory, $1.9 million to develop
sales, marketing and distribution capability including working capital, and $0.7
million for glucose monitoring development. None of such payments consisted of
direct or indirect payments to directors, officers, 10% stockholders or
affiliates of the Company.
-30-
<PAGE> 31
ITEM 6. SELECTED FINANCIAL DATA
SPECTRX
(IN THOUSANDS EXCEPT FOR PER SHARE FIGURES)
<TABLE>
<CAPTION>
YEAR ENDED THROUGH DECEMBER 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES $ 1,406 $ 901 $ 452 $ 1,179 $ 122
COST AND EXPENSES:
COST OF PRODUCT SALES 1,626 0 0 0 0
RESEARCH & DEVELOPMENT 4,234 3,714 1,815 1,189 869
MARKETING 1,058 835 221 146 126
GENERAL & ADMINISTRATIVE 1,908 2,272 1,526 637 350
------- -------- ------- ------- -------
LOSS FROM OPERATIONS (7,420) (5,920) (3,110) (793) (1,223)
NET INTEREST AND OTHER INCOME (EXPENSE) 783 194 (68) 113 (124)
------- -------- ------- ------- -------
NET LOSS $(6,637) $ (5,726) $(3,178) $ (680) $(1,347)
======= ======== ======= ======= =======
NET LOSS PER SHARE
BASIC $ (.84) $ (1.26) $ (2.13) $ (0.48) $ (0.96)
DILUTED $ (.84) $ (1.26) $ (2.13) $ (0.48) $ (0.96)
SHARES USED TO COMPUTE NET LOSS PER SHARE
BASIC 7,926 4,528 1,494 1,410 1,410
DILUTED 7,926 4,528 1,494 1,410 1,410
CONSOLIDATED BALANCE SHEET DATA
TOTAL ASSETS 7,654 14,999 5,946 751 1,327
TOTAL LONG TERM OBLIGATIONS 0 752 250 0 475
</TABLE>
-31-
<PAGE> 32
ITEM 7. 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.
Examples of such uncertainties and risks include, but are not limited to,
whether the Company's products in development will prove safe and effective;
whether and when the Company or its strategic partners will obtain approval from
the United States Food and Drug Administration ("FDA") and corresponding foreign
agencies; the Company's need to achieve manufacturing scale-up in a timely
manner, and its need to provide for the efficient manufacturing of sufficient
quantities of its products; the lack of immediate alternate sources of supply
for some critical components of its products; the Company's patent and
intellectual property position; the company's need to fully develop the
marketing, distribution, customer service and technical support and other
functions critical to the success of the Company's potential product lines; the
effectiveness and ultimate market acceptance of the Company's products; and the
dependence of the Company on its strategic partners for funding, development
assistance, clinical trials, distribution and marketing of products developed by
the Company. 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 sale 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. The company has entered into collaborative arrangements with
Abbott, Roche Diagnostics BMC, Respironics, (a successor to Healthdyne
Technologies, Inc.) and Welch Allyn for its glucose monitoring, diabetes
screening, infant jaundice and cancer detection 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 December 31, 1998, as a result of a subsequent financing,
SpectRx's interest in FluorRx was 47%.
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 December 31, 1998, the Company
had accumulated deficit of approximately $18.8 million. To date, the Company has
engaged primarily in research and development efforts. The Company first
generated revenues from product sales in 1998 and does not have significant
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 2000 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.
The majority 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
-32-
<PAGE> 33
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.
The Company has entered into collaborative arrangements with Abbott,
Roche Diagnostics BMC, Respironics, and Welch Allyn. 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 sales 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.
RESULTS OF OPERATIONS
Comparison Of 1998 and 1997
General. Net losses increased to approximately $6.6 million, or ($.84)
per share (on more shares), for the year ended December 31, 1998 from
approximately $5.7 million, or ($1.26) per share, in 1997 due to increases in
cost of production, research and development expenses and marketing expenses.
The Company expects net losses to continue. If the Company is unable to attain
certain milestones under a collaboration agreement, its collaborative partner
may not make milestone payments under, or may terminate altogether, such
agreement. If this were to happen, future net losses would escalate rapidly
because of spending increases necessary to complete research, development and
clinical trials of the Company's products, commence sales and marketing efforts
and establish a manufacturing capability.
Revenues and Cost of Sales. Revenues increased to approximately $1.4
million for the year ended December 31, 1998 from approximately $900,000 in
1997. All of the increase was due to product sales of the Company's BiliChek(TM)
product (approximately $823,000) which was introduced in April 1998. Revenue
from collaborative agreements, which is generally predicated on achievement of
milestones, declined to approximately $583,000 for the twelve months ended
December 31, 1998 from approximately $900,000 in 1997. Cost of Sales were
approximately $1.6 million for the twelve months ended December 31, 1998. There
was no Cost of Sales in 1997. All Cost of Sales are related to product sales and
those costs exceeded sales revenues because the Company is in the early stages
of product introduction and has excess capacity.
Research and development expenses. Research and development expenses
increased to approximately $4.2 million for the year ended December 31, 1998
from approximately $3.7 million in 1997. The increase in research and
development expenses was primarily due to increases in compensation ($392,000)
primarily related to new initiatives in continuous glucose monitoring and cancer
detection, in clinical costs ($108,000) for the company's infant jaundice and
diabetes screening products, in legal expenses ($76,000) for patent filings and
patent maintenance, offset by a reduction in FluorRx expense ($550,000) as a
result of reporting FluorRx results under the equity method. 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 $1.1 million for the year ended December 31, 1998 from $835,000
in 1997. The increase was due primarily to increases in advertising and
marketing materials ($110,000), in travel ($70,000) and compensation costs
($50,000) for additional personnel all
-33-
<PAGE> 34
related to the infant jaundice product introduction and marketing activity.
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 decreased to approximately $1.9 million for the year ended December 31,
1998 from approximately $2.3 million in 1997. The decrease in general and
administrative expense was due to the exclusion of FluorRx administrative
expense in 1998. SpectRx did not consolidate FluorRx during 1998 as its
ownership declined below 50%. (See Note 3 in the accompanying notes). In
addition, production planning and development expenses of approximately $750,000
were incurred as general and administrative expense in 1997; and because
production began in 1998 all such costs are included in cost of product sales.
These decreases were offset primarily by increases in compensation ($200,000),
recruiting expenses ($105,000), and outside professional fees ($85,000). General
and administrative expenses are expected to increase in the future as a result
of overhead costs associated with expanded research and development activities
and, to a lesser extent, expenses associated with being a public company.
Net interest expense and other expense. Net interest and other income
increased to $783,000 for the year ended December 31, 1998 from $194,000 in
1997. This increase results primarily from a one-time gain of $329,000 (net of
previously recognized losses in connection with the deconsolidation of FluorRx.
(See Note 3 in the accompanying notes.) and from an increase in interest
received on cash balances received from the initial public offering, available
for a full year in 1998, offset by other expense items.
Comparison Of 1997 and 1996
General. Net losses increased to approximately $5.7 million, or
($1.26) per share, for the year ended December 31, 1997 from approximately $3.2
million, or ($2.13) per share, in 1996 due to increases in research and
development expenses, marketing expenses and general and administrative
expenses.
Research and development expenses. Research and development expenses
increased to approximately $3.4 million for the year ended December 31, 1997
from approximately $1.8 million in 1996. The increase in research and
development expenses was primarily due to increases in compensation costs,
prototype materials and contract research costs, and to a lesser extent,
increases in consulting expenses and outside services.
Sales and marketing expenses. Sales and marketing expenses increased
to $835,000 for the year ended December 31, 1997 from $221,000 in 1996. The
increase was due primarily to compensation and recruiting costs, product design
costs, advertising expenses and other marketing expenses related to introduction
of the Company's infant jaundice product.
General and administrative expenses. General and administrative
expenses increased to approximately $2.6 million for the year ended December 31,
1997 from approximately $1.5 million in 1996. The increase in general and
administrative expense was due to increases in compensation, facility costs,
production development costs and legal fees.
Net interest expense and other expense. Net interest and other income
increased to $194,000 for the year ended December 31, 1997 from an expense of
$68,000 in 1996. This increase results from the redemption of convertible notes
which were outstanding during 1996, and from an increase in interest received on
cash balances received from the initial public offering, offset by other expense
items.
-34-
<PAGE> 35
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily
through private sales of its debt and equity securities and public sale of its
common stock. From October 27, 1992 (inception) through December 31, 1998, the
Company received approximately $25.8 million in net proceeds from sales of its
debt and equity securities. At December 31, 1998, the Company had cash of
approximately $5.0 million and working capital of approximately $5.3 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, of approximately
$13.2 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 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 12
months, but may not be sufficient to fund the Company's operations to the point
of commercial introduction of its glucose monitoring product.
OTHER MATTERS
It is possible that the Company's currently installed computer systems,
software products or other business systems, or those of the Company's
customers, vendors or resellers, working either alone or in conjunction with
other software or systems, will not accept input of, store, manipulate and
output dates for the years 1999, 2000 or thereafter without error or
interruption (commonly known as the "Year 2000" problem).
The Company has conducted a review of its business systems, including
its computer systems, and is querying its customers, vendors and resellers as to
their progress in identifying and addressing problems that their computer
systems may face in correctly interrelating and processing date information as
the year 2000 approaches and is reached. However, there can be no assurance that
the Company will identify all such Year 2000 problems in its computer systems or
those of its customers, vendors or resellers in advance of their occurrence or
that the Company will be able to successfully remedy any problems that are
discovered.
The expenses of the Company's efforts to identify and address such
problems, or the expenses or liabilities to which the Company may become subject
as a result of such problems, could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
estimates its potential expense related to Year 2000 problems, including delayed
revenues, increased working capital, new purchased systems, testing and internal
coding of certain software applications is between $150,000 and $200,000, though
there can be no absolute assurance that the Company has anticipated all such
costs. In addition, the Company has established contingency plans including
production schedules, inventory planning, identification of alternate sources of
supply and backup administrative systems, though there can be no assurance that
the Company has identified all such areas that might need contingency planning.
The revenue stream and financial stability of existing customers may be
adversely impacted by Year 2000 problems, which could cause fluctuations in the
Company's revenues. In addition, failure of the Company to identify and remedy
Year 2000 problems could put the Company at a competitive disadvantage relative
to companies that have corrected such problems.
Item 7A Quantitative and Qualitative Disclosure Regarding Market Risk
[not applicable]
-35-
<PAGE> 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SPECTRX, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS 1997 1998
================================================================================ ======== =========
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 12,449 $ 4,962
Accounts receivable, net of allowance for doubtful accounts of $29 and $24 in 554 683
1997 and 1998 respectively
Inventories 218 404
Other current assets 117 119
-------- --------
Total current assets 13,338 6,168
-------- --------
PROPERTY AND EQUIPMENT, NET 1,132 973
-------- --------
OTHER ASSETS:
Other assets, net 87 42
Due from related parties 442 471
-------- --------
Total other assets 529 513
-------- --------
$ 14,999 $ 7,654
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1998
================================================================================ ======== =========
CURRENT LIABILITIES:
Accounts payable $ 515 $ 436
Accrued liabilities 758 399
-------- --------
Total current liabilities 1,273 835
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
CONVERTIBLE SUBORDINATED PROMISSORY NOTES 250 0
-------- --------
MINORITY INTEREST 502 0
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 5,000 shares authorized , 0 shares issued in 0 0
1997 and 1998
Common stock, $.001 par value; 50,000 shares authorized, 7.748 and 8,014 shares 8 8
issued and outstanding in 1997 and 1998, respectively
Additional paid-in capital 25,372 25,761
Deferred compensation (210) (134)
Notes receivable from officers (48) (31)
Accumulated deficit (12,148) (18,785)
-------- --------
Total stockholders' equity 12,974 6,819
-------- --------
$ 14,999 $ 7,654
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
-36-
<PAGE> 37
SPECTRX, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
REVENUES $ 452 $ 901 $ 1,406
------- ------- -------
EXPENSES:
Product sales 0 0 1,626
Research and development 1,815 3,714 4,234
Sales and marketing 221 835 1,058
General and administrative 1,526 2,272 1,908
------- ------- -------
3,562 6,821 8,826
------- ------- -------
Operating loss (3,110) (5,920) (7,420)
INTEREST EXPENSE (INCOME), NET 132 (430) (462)
OTHER (INCOME) EXPENSE (64) 236 (321)
------- ------- -------
NET LOSS $(3,178) $(5,726) $(6,637)
======= ======= =======
BASIC AND DILUTED NET LOSS PER SHARE $ (2.13) $ (1.26) $ (.84)
======= ======= =======
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 1,494 4,528 7,926
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
-37-
<PAGE> 38
SPECTRX, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
-------------------------------------------------------------- ----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
=====================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,1995 3,104 3 0 0 0 0 1,410 1
Common stock warrants issued in
connection with convertible
subordinated promissory notes 0 0 0 0 0 0 0 0
Conversion of subordinated notes 0 0 390 0 0 0 0 0
Issuance of Series B preferred
stock 0 0 882 1 0 0 0 0
Issuance of Series C preferred
stock 0 0 0 0 500 1 0 0
Issuance of common stock in
settlement of a dispute 0 0 0 0 0 0 29 0
Issuance of common stock for
purchased technology 0 0 0 0 0 0 71 1
Exercise of warrants 0 $ 0 0 $ 0 0 $ 0 22 $0
Issuance of stock options below
market 0 0 0 0 0 0 0 0
Amortization of deferred 0 0 0 0 0 0 0 0
compensation
Net loss 0 0 0 0 0 0 0 0
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 3,104 3 1,272 1 500 1 1,532 2
Issuance of common stock at $7
per share, net of issuance
costs of $909,000 0 0 0 0 0 0 2,160 1
Conversion of convertible
preferred stocks (3,104) (3) (1,272) (1) (500) (1) 3,483 4
Exercise of warrants at a
weighted average price per
share of $1.24 0 0 0 0 0 0 560 1
Exercise of stock options at a
weighted average price per
share of $.26 0 0 0 0 0 0 10 0
Employee stock purchase plan at
a weighted average price per
share of $5.95 0 0 0 0 0 0 3 0
Amortization of deferred
compensation 0 0 0 0 0 0 0 0
Net loss 0 0 0 0 0 0 0 0
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 0 $ 0 0 $ 0 0 $ 0 7,748 $8
====================================================================================
Exercise of stock options 0 0 0 0 0 0 169 0
Employee stock purchase plan 0 0 0 0 0 0 14 0
Amortization of deferred
compensation 0 0 0 0 0 0 0 0
Conversion of subordinated
promissory notes to equity
securities 0 0 0 0 0 0 83 0
Repayment of note receivable
from officer 0 0 0 0 0 0 0 0
Net loss 0 0 0 0 0 0 0 0
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 0 $ 0 0 $ 0 0 $ 0 8,014 $8
====================================================================================
<CAPTION>
NOTES
ADDITIONAL RECEIVABLE
PAID-IN DEFERRED FROM ACCUMULATES STOCKHOLDERS
CAPITAL COMPENSATION OFFICERS DEFICIT EQUITY
================================================================
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,1995 3,252 0 (48) (3,244) (36)
Common stock warrants issued in
connection with convertible
subordinated promissory notes 59 0 0 0 59
Conversion of subordinated notes 1,560 0 0 0 1,560
Issuance of Series B preferred
stock 3,504 0 0 0 3,505
Issuance of Series C preferred
stock 2,752 0 0 0 2,753
Issuance of common stock in
settlement of a dispute 14 0 0 0 14
Issuance of common stock for
purchased technology 34 0 0 0 35
Exercise of warrants $ 24 $ 0 $ 0 $ 0 $ 24
Issuance of stock options below
market 304 (304) 0 0 0
Amortization of deferred 0 18 0 0 18
compensation
Net loss 0 0 0 (3,178) (3,178)
------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 11,503 (286) (48) (6,422) 4,754
Issuance of common stock at $7
per share, net of issuance
costs of $909,000 13,152 0 0 0 13,153
Conversion of convertible
preferred stocks 1 0 0 0 0
Exercise of warrants at a
weighted average price per
share of $1.24 693 0 0 0 694
Exercise of stock options at a
weighted average price per
share of $.26 3 0 0 0 3
Employee stock purchase plan at
a weighted average price per
share of $5.95 20 0 0 0 20
Amortization of deferred
compensation 0 76 0 0 76
Net loss 0 0 0 (5,726) (5,726)
-----------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $25,372 $(210) $(48) $(12,148) $ 12,974
===========================================================
Exercise of stock options 37 0 0 0 37
Employee stock purchase plan 63 0 0 0 63
Amortization of deferred
compensation 0 76 0 0 76
Conversion of subordinated
promissory notes to equity
securities 289 0 0 0 289
Repayment of note receivable
from officer 0 0 17 0 17
Net loss 0 0 0 (6,637) (6,637)
-----------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $25,761 $(134) $(31) $(18,785) $ 6,819
===========================================================
</TABLE>
The accompanying notes are an integral part of these statements.
-38-
<PAGE> 39
SPECTRX, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1997 1998
======= ======== ========
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,178) $ (5,726) $ 6,637
------- -------- --------
Adjustments to reconcile net loss to net cash in operating activities:
Depreciation and amortization 182 281 375
Gain on deconsolidation of FluorRx 0 0 (329)
Amortization of debt discount 66 0 0
Issuance of stock in settlement of dispute 14 0 0
Amortization of deferred compensation 18 76 76
Changes in operating assets and liabilities:
Accounts receivable 215 (553) (129)
Inventory 0 (218) (186)
Other assets (60) (36) (16)
Due from related parties (412) (30) (29)
Accounts payable 391 (42) (79)
Accrued liabilities 317 354 (4)
------- -------- --------
Total adjustments 731 (168) (321)
------- -------- --------
Net cash used in operating activities (2,447) (5,894) (6,958)
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (422) (769) (321)
Additions to purchased technology (49) 0 0
------- -------- --------
Net cash used in investing activities (471) (769) (321)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net 24 13,870 100
Issuance of Series B preferred stock, net 3,505 0 0
Issuance of Series C preferred stock, net 2,753 0 0
Issuance of redeemable convertible preferred stock FluorRx 0 521 0
Issuance of warrants 18 0 0
Issuance of convertible subordinated promissory notes 1,232 0 0
Repayment of note receivable from officer 0 0 17
------- -------- --------
Net cash provided by financing activities 7,532 14,391 117
------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 4,614 7,728 (7,162)
------- -------- --------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 107 4,721 12,124
------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,721 $ 12,449 $ 4,962
======= ======== ========
CASH PAID FOR:
Interest $ 0 $ 10 $ 8
======= ======== ========
Income taxes $ 0 $ 0 $ 0
======= ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Conversion of preferred stock to common stock $ 0 $ 5 $ 0
======= ======== ========
Conversion of subordinated promissory notes to equity
securities $ 1,560 $ 0 $ 289
======= ======== ========
Warrants issued in connection with convertible
subordinated notes and redeemable convertible
preferred stock $ 41 $ 19 $ 0
======= ======== ========
Issuance of common stock for purchased technology $ 35 $ 0 $ 0
======= ======== ========
</TABLE>
-39-
<PAGE> 40
The accompanying notes are an integral part of these statements.
-40-
<PAGE> 41
SPECTRX, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
1. ORGANIZATION AND BACKGROUND
SpectRx, Inc. (the "Company") is engaged in the research and development
of products that offer less invasive and painless alternatives to blood
tests currently used for glucose monitoring, diabetes screening, infant
jaundice and cervical cancer. The Company's goal is to introduce products
that reduce or eliminate pain, are convenient to use, and provide rapid
results at the point of care, thereby improving patient well-being and
reducing healthcare costs. The Company's glucose monitoring, diabetes
screening, infant jaundice products and the products in development for
cervical cancer are based on proprietary electro-optical and microporation
technology that can eliminate the pain and inconvenience of a blood
sample. The Company has entered into collaborative arrangements with
Abbott Laboratories ("Abbott"), Roche Diagnostics BMC ("Roche"),
Respironics, Inc ("Respironics"), and Welch Allyn, Inc. ("Welch Allyn"),
to facilitate the development, commercialization, and introduction of its
glucose monitoring, diabetes screening, and infant jaundice products, and
cervical cancer detection system, respectively.
In prior periods, the Company was considered a development-stage company,
as defined by Statement of Financial Accounting Standards ("SFAS") No. 7,
"Accounting and Reporting by Development Stage-Enterprises." During fiscal
year 1998, the Company exited the development stage due to the manufacture
and sale of its infant jaundice product.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash or cash equivalents.
INVENTORIES
Inventories are stated at lower of cost or market, using the first-in,
first-out method. Inventories are summarized as follows at December 31,
1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Raw materials $218 $261
Work in process 0 5
Finished goods 0 138
---- ----
$218 $404
==== ====
</TABLE>
-41-
<PAGE> 42
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed
using the straight-line method over estimated useful lives of five to
seven years. Expenditures for repairs and maintenance are expensed as
incurred. Property and equipment are summarized as follows at December 31,
1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
====== ======
<S> <C> <C>
Equipment $1,383 1,496
Furniture and fixtures 256 314
------ ------
1,639 1,810
Less accumulated depreciation 507 837
------ ------
Property and equipment, net $1,132 $ 973
====== ======
</TABLE>
OTHER ASSETS
Other assets include net purchased technology of $70,000 and $42,000 at
December 31, 1997 and 1998, respectively, which is being amortized using
the straight-line method over its estimated useful life of five years.
PATENT COSTS
Costs incurred in filing, prosecuting, and maintaining patents are
expensed as incurred. Such costs aggregated approximately $165,000,
$286,000, and $496,000 in 1996, 1997, and 1998, respectively.
REVENUE RECOGNITION
Revenue from collaborative research and development agreements is recorded
when earned. Periodic license fee payments under collaborative agreements
related to future performance are deferred and recognized as income when
earned.
RESEARCH AND DEVELOPMENT
Research and development expenses consist of expenditures for research
conducted by the Company and payments made under contracts with
consultants or other outside parties. All research and development costs
are expensed as incurred.
NET LOSS PER SHARE
The calculation and presentation of earnings per share are presented in
accordance with SFAS No. 128, "Earnings Per Share". Basic earnings per
share are based on the weighted average number of shares outstanding.
Diluted earnings per share are based on the weighted average number of
shares outstanding and the dilutive effect of common stock equivalent
shares ("CSEs") issuable on the conversion of convertible preferred stock
(using method). For all periods presented, CSEs have been excluded from
weighted average shares outstanding, as their impact was antidilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of cash, trade accounts receivable, trade accounts
payable, and other financial instruments approximate their fair values
principally because of the short-term maturities of these instruments. The
fair value of the Company's long-term debt is estimated based on the
current rates offered to the Company for debt of similar
-42-
<PAGE> 43
terms and maturities. Under this method, the fair value of the Company's
long-term debt was not significantly different than the stated value at
December 31, 1997.
LONG-LIVED ASSETS
The Company periodically reviews the values assigned to long-lived assets,
such as property and equipment and purchased technology, to determine
whether any impairments are other than temporary. Management believes that
the long-lived assets in the accompanying balance sheets are appropriately
valued.
COMPREHENSIVE INCOME
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. The Company
has adopted the new pronouncement, which establishes new rules for the
reporting and display of comprehensive income and its components; however,
the Company has no other comprehensive income items as defined in SFAS No.
130.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheets as either an asset
or liability measured at it fair value, and changes in the derivative's
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met.
The Company plans to adopt SFAS No. 133 in the first quarter of fiscal
2000. Management does not believe the adoption of this statement will have
a material effect on the financial statements of the Company.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
3. INVESTMENT IN FLUORRX, INC.
In December 1996, the Company sublicensed certain technology to and
acquired a 65% interest in FluorRx, Inc. ("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,
March 1998, and August 1998, FluorRx sold additional convertible preferred
stock for net cash proceeds of $521,000, $429,000, and $511,000,
respectively. The issuance of additional preferred stock reduced the
Company's ownership (on a converted basis) to 47%.
For the years ended December 31, 1996 and 1997, FluorRx incurred operating
losses of $58,000 and $632,000, respectively. 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. Beginning with the December 1997 funding
and through the August 1998 funding, the Company consolidated the FluorRx
losses, but with appropriate allocations to the minority shareholders.
FluorRx losses recorded by the Company during the fiscal 1998 amounted to
$306,000. Effective with the August 1998 funding, the Company began
accounting for its investment in FluorRx under the equity method of
accounting. In connection with the change in accounting from consolidation
to the equity method, the Company adjusted its investment in FluorRx to
$0, which resulted in a one-time gain of $635,000. All FluorRx activity
(losses and the one-time gain) is reflected in other (income) expense in
the accompanying statements of operations. The Company has also suspended
recording
-43-
<PAGE> 44
losses from its investment in FluorRx. Suspended equity losses amounted to
$577,000 and $791,000 for the year ended and as of December 31, 1998.
4. CONVERTIBLE SUBORDINATED PROMISSORY NOTES
In November 1995 and April 1996, the Company issued 10% convertible
subordinated promissory notes for $500,000 and $982,000, respectively.
Pursuant to the terms of these notes, all outstanding principal and
accrued interest were converted in August 1996 into 389,951 shares of
Series B convertible preferred stock. Warrants to purchase 107,143 and
210,470 shares of common stock were issued with the promissory notes in
consideration for additional proceeds of $5,000 and $18,000, respectively,
in November 1995 and April 1996, respectively (Note 6). The value of the
warrants issued in November 1995 and April 1996 was determined to be
$35,000 and $59,000, respectively, based on the difference between the
stated interest rate and the Company's estimated effective borrowing rate
for the terms of the notes. The noncash allocation to the warrants of
$30,000 and $41,000 in November 1995 and April 1996, respectively, was
accounted for as a debt discount. The unamortized debt discount was
expensed as additional interest expense upon the conversion of the notes
in August 1996. In June 1996, the Company issued an 8% convertible
subordinated promissory note for $250,000. In June 1998, the holder of the
note converted outstanding principal and interest into 82,637 shares of
common stock at a conversion rate of $3.50.
5. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
In July 1997, the Company successfully completed its initial public
offering of common stock. The Company sold 2,160,000 shares of common
stock, including an underwriters over-allotment of 160,000 shares, at an
initial public offering price of $7. The total proceeds of the initial
public offering, net of underwriting discounts and offering expenses, were
approximately $13.2 million. In connection with the offering, all
outstanding shares of Series A, B, and C preferred stock converted into
3,482,762 shares of common stock. Additionally, warrants to purchase
559,986 shares of common stock were exercised for proceeds of $694,000.
PREFERRED STOCK
In January 1997, the Company authorized 5,000,000 shares of preferred
stock, with a $.001 par value. The board of directors has the authority to
issue these shares and to fix dividends, voting and conversion rights,
redemption provisions, liquidation preferences, and other rights and
restrictions.
STOCK OPTIONS
In May 1995, the Company adopted the 1995 Stock Option Plan (the "Plan")
(as amended), under which 1,428,572 shares of common stock are authorized
and reserved for use in the Plan. The Plan allows the issuance of
incentive stock options, nonqualified stock options, and stock purchase
rights. The exercise price of options is determined by the Company's board
of directors, but incentive stock options must be granted at an exercise
price equal to the fair market value of the Company's common stock as of
the grant date. Options generally become exercisable over four years and
expire ten years from the date of grant. At December 31, 1998, options to
purchase 275,720 shares of common stock were available for future grant
under the Plan.
-44-
<PAGE> 45
Stock option activity for each of the three years ended December 31, 1998
is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
OPTIONS PRICE PER SHARE
========= ================
<S> <C> <C>
Outstanding, December 31, 1995 325,851 0.21
Granted 338,940 1.05
Exercised (403) 0.21
Canceled (1,026) 0.21
--------
Outstanding, December 31, 1996 663,362 0.64
Granted 418,000 7.50
Exercised (10,065) 0.26
Cancelled (5,656) 0.46
--------
Outstanding, December 31, 1997 1,065,641 3.34
Granted 121,000 6.43
Exercised (169,472) 0.22
Canceled (44,256) 3.69
--------
Outstanding, December 31, 1998 972,913 4.25
=========
Exercisable, December 31, 1998 424,387 2.56
=========
</TABLE>
The following table sets forth the range of exercise prices, number of
shares, weighted average exercise price, and remaining contractual lives
by groups of similar price and grant date:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER AVERAGE CONTRACTUAL NUMBER AVERAGE
EXERCISE PRICES OF SHARES PRICE LIFE OF SHARES PRICE
-------------------------- --------- ------------ ----------- --------- --------
<S> <C> <C> <C> <C> <C>
$.21-$.70 387,625 $0.54 7.2 years 273,607 $0.51
$2.45-$4.13 99,288 2.91 8.5 years 37,337 2.50
$5.13-$8.50 486,000 7.48 9.0 years 113,443 7.51
--------- --------
Total 972,913 4.25 8.2 years 424,387 2.56
========= ========
</TABLE>
In June 1996, November 1996, and December 1996, the Company granted
options to purchase 269,652, 8,573, and 60,715, respectively, shares of
common stock at exercise prices of $.70, $2.45, and $2.45 per share,
respectively. In connection with the issuance of these options, the
Company recognized $304,000 as deferred compensation for the excess of the
deemed value for accounting purposes of the common stock issuable upon
exercise of such options over the aggregate exercise price of such
options. This deferred compensation is amortized ratably over the vesting
period of the options.
The Company has elected to account for its stock-based compensation plan
under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees;" however, the Company has computed for pro
forma disclosure purposes the value of all options granted in each of the
three years ended December 31, 1998 using the Black-Scholes option pricing
model as prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation," and using the following weighted average assumptions used
for grants in 1996, 1997, and 1998:
-45-
<PAGE> 46
<TABLE>
<CAPTION>
1996 1997 1998
======= ====== ======
<S> <C> <C> <C>
Risk-free interest rate 6.6% 5.86% 5.17%
Expected dividend yield 0.0% 0.0% 0.0%
Expected lives 4 years 4 years 4 YEARS
Expected volatility 90.0% 58.0% 58.0%
</TABLE>
The total values of the options granted during the years ended December
31, 1996, 1997, and 1998 were computed as approximately $511,000,
$1,587,000, and $437,000 respectively, which would be amortized over the
vesting period of the options. If the Company had accounted for these
plans in accordance with SFAS No. 123, the Company's reported net loss and
net loss per share for each of the three years ended December 31, 1998
would have increased by the following pro forma amounts:
<TABLE>
<CAPTION>
1996 1997 1998
========= ========== =========
<S> <C> <C> <C>
Net loss:
As reported $ (3,178) $ (5,726) $(6,637)
Pro forma (3,226 (5,890) $(7,226)
Basic and diluted net loss per share:
As reported $ (2.13) $ (1.26) $ (.84)
Pro forma (2.16) (1.30) (.91)
</TABLE>
WARRANTS
In connection with the November 1995 and April 1996 note sales (Note 4),
the Company issued warrants to purchase 317,613 shares of common stock at
an exercise price per share of 20% of the price per share paid in the next
equity financing of $5,000,000 or more, inclusive of the notes and
warrants subject to conversion. In August 1996, the exercise price was set
at $1.12 per share.
Upon the close of the initial public offering, all outstanding warrants to
purchase 559,986 shares of common stock were exercised providing proceeds
of approximately $694,000.
EMPLOYEE STOCK PURCHASE PLAN
In connection with the Offering, the Company adopted an employee stock
purchase plan under which the Company may issue up to 214,286 shares of
common stock. Eligible employees may use up to 10% of their compensation
to purchase, through payroll deductions, the Company's common stock at the
end of each plan period for 85% of the lower of the beginning or ending
stock price in the plan period. At December 31, 1998, there were 196,976
shares available for future issuance under the Plan.
6. INCOME TAXES
The Company has incurred net operating losses ("NOLs") since inception. As
of December 31, 1998, the Company had net operating loss carryforwards of
approximately $18,032,000 available to offset its future income tax
liability. The NOL carryforwards begin to expire in the year 2007. The
Company has recorded a valuation allowance for all NOL carryforwards.
Utilization of existing NOL carryforwards may be limited in future years,
if significant ownership changes have occurred.
-46-
<PAGE> 47
Components of deferred tax assets are as follows at December 31, 1997 and
1998:
<TABLE>
<CAPTION>
1997 1998
=========== ===========
<S> <C> <C>
NOL carryforwards $ 4,203,000 $ 6,852,000
Valuation allowance (4,203,000) (6,852,000)
----------- -----------
Deferred tax assets $ 0 $ 0
=========== ===========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
Future minimum rental payments at December 31, 1998 under noncancellable
operating leases for office space and equipment are as follows:
<TABLE>
<S> <C>
1999 $275,000
2000 203,000
2001 88,000
2002 61,000
2003 5,000
</TABLE>
Rental expense was $92,000, $215,000 and $261,000 in 1996, 1997, and 1998,
respectively.
In the past, the Company has been subject to certain asserted and
unasserted claims against certain intellectual property rights owned and
licensed by the Company. A successful claim against intellectual property
rights owned or licensed by 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. In the opinion of management, there
are no known claims against the Company's owned or licensed intellectual
property rights that will have a material adverse impact on the Company's
financial position or results of operations.
8. RELATED-PARTY TRANSACTIONS
In connection with a June 1994 sale of restricted stock, the Company
loaned two officers of the Company an aggregate of $48,000 of which
$31,000 is outstanding at December 31, 1998. These loans were secured by
common stock of the Company held by the officers, bear interest at 6% per
annum, and become payable on June 30, 1999. Outstanding balances are
classified as a reduction of stockholders' equity in the accompanying
balance sheets.
In March 1996, the Company entered into a license and joint development
agreement with Altea, a company equally owned by Jonathan Eppstein, a
former officer and principal stockholder of the Company, and his sister
(Note 9). On March 8, 1996, pursuant to the terms of the agreement, the
Company received certain rights to technology useful in glucose
monitoring, issued 71,429 shares of common stock, which were valued at
$35,000, and made cash payments totaling $25,000 for the rights to the
technology. The Company paid royalties to Altea totaling $273,000,
$100,000 and $137,500 during 1996, 1997 and 1998, respectively.
In October 1996, the Company loaned two officers a total of $400,000. The
loans are secured by common stock of Laser Atlanta Optics, Inc. ("LAO").
The Company and LAO are related through a common group of shareholders.
The loans bear interest at 6.72% per annum and are due and payable in cash
in October 2001. Outstanding balances are reflected as due from related
parties in the accompanying balance sheets.
In October 1996, the Company entered into a research and development and
license agreement (the "Abbott Agreement") with Abbott for the development
and commercialization of the Company's glucose monitoring
-47-
<PAGE> 48
product (Note 10). Under the Abbott Agreement, the Company receives
payments on achievement of milestones and a royalty on Abbott product
sales for which the Company recorded revenues of $500,000 during 1997
related to the achievement of a milestone. The Abbott Agreement also
requires Abbott to reimburse certain direct expenses incurred by the
Company in connection with the development of the glucose monitoring
products. Reimbursed expenses of $490,000, and $1,788,000 and $1,260,000
for the years ended December 31, 1996, 1997, and 1998, respectively, have
been netted with research and development expenses in the accompanying
statements of operations. In connection with the Abbott Agreement, Abbott
purchased $3 million of Series C preferred stock.
In 1997, a portion of the proceeds from the Company's sale of convertible
subordinated promissory notes and Series A and B preferred stock were
received from officers, directors, or other parties related to the Company
as a result of previous equity transactions. The sales were conducted
concurrently with and on the same terms as those entered into with
unrelated parties.
9. LICENSE AND TECHNOLOGY AGREEMENTS
As part of the Company's efforts to conduct research and development
activities and to commercialize potential products, the Company, from time
to time, enters into agreements with certain organizations and individuals
that further those efforts but also obligate the Company to make future
minimum payments or to remit royalties ranging from 1% to 3% of revenue
from sale of commercial products developed from the research.
The Company generally has the option not to make required minimum royalty
payments, in which case the Company loses the exclusive license to develop
applicable technology. Minimum required payments to maintain exclusive
rights to licensed technology are as follows at December 31, 1998:
<TABLE>
<S> <C>
1999 $ 385,000
2000 760,000
2001 1,110,000
2002 1,360,000
2003 1,360,000
</TABLE>
During 1996, the Company paid $273,000 in royalties in connection with the
sale of the Series C preferred stock, of which $50,000 was expensed as
required minimum payments and $223,000 was netted with the proceeds of the
related stock sale. During 1997 and 1998, the Company paid $110,000 and
$188,000, respectively for royalty payments.
Additionally, the Company is obligated to obtain and maintain certain
patents, as defined by the agreements.
-48-
<PAGE> 49
10. REVENUES FROM COLLABORATIVE AGREEMENTS
The Company has entered into collaborative research and development
agreements (the "Agreements") with collaborative partners for the joint
development, regulatory approval, manufacturing, marketing, distribution,
and sales of products. The Agreements generally provide for nonrefundable
payments upon contract signing and additional payments upon reaching
certain milestones with respect to technology. The Abbott Agreement
requires Abbott to remit royalties to the Company based on net product
sales and to reimburse certain direct expenses incurred by the Company.
The Welch Allyn agreement requires welch allyn to share equally the
operating expenses and cost of capital assets, to make milestone payments
based on progress achieved, and to pay SpectRx a technology access fee.
Welch Allyn will have the exclusive rights to manufacture and supply the
product with the exception of a certain module. In connection with
Respironics and Roche, the partners are required to purchase products
manufactured by the Company at a predetermined profit margin subject to
renegotiation between the parties in certain instances.
11. BUSINESS SEGMENT INFORMATION
The Company operates in one business segment, the research and development
of products that offer less invasive and painless alternatives to blood
test currently used for glucose monitoring, diabetes screening, cervical
cancer detection, and infant jaundice. The Company had no product sales
prior to fiscal year 1998. During fiscal year 1998, total product revenues
of $823,000 related to the Company's infant jaundice product. The Company
has licensed the right to distribute the infant jaundice product within
the United States and Canada to Respironics. The Company distributes the
product outside the United States and Canada through a diverse group of
foreign distributors. All sales are payable in United States dollars.
Product revenues attributable to countries based on the location of the
customer are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
==== ==== ====
<S> <C> <C> <C>
United States $0 $0 $191
France 0 0 131
Germany 0 0 126
Other foreign countries 0 0 375
-- -- ----
Total $0 $0 $823
== == ====
</TABLE>
Because all product revenues are derived from the sale of U.S.-produced
product, the Company has no significant long-lived assets located outside
the United States.
Major customers who contributed 10% or more of the Company's total
revenues were as follows for each of the three years ended December 31,
1996, 1997, and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
==== ==== ====
<S> <C> <C> <C>
Abbott 55% 0%
Welch Allyn 0 0 18
Respironics 100 28 37
LJL Biosystems, Inc. 0 17 0
</TABLE>
-49-
<PAGE> 50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SpectRx, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of SPECTRX, INC. (a
Delaware corporation) as of December 31, 1997 and 1998 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1998 . These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SpectRx, Inc. and
subsidiary as of December 31, 1997 and 1998 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
February 12, 1999
-50-
<PAGE> 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-51-
<PAGE> 52
PART III
Certain information required by Part III is omitted from this Report on Form
10-K in that the Registrant will file a definitive proxy statement within 120
days after the end of the fiscal year covered by this Report pursuant to
Regulation 14A relating to the Registrant's 1999 Annual Meeting of Stockholders
(the "Proxy Statement") to be held on May 25, 1999, and certain information
included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors and nominees for directors of the
Company is incorporated by reference to the Company's Proxy Statement.
The executive officers of the Company, who are elected by and serve at
the discretion of the Board of Directors, and their ages at February 28, 1999,
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Mark A. Samuels 41 Chairman, Chief Executive Officer and Director
Keith D. Ignotz 51 President, Chief Operating Officer and Director
Thomas H. Muller, Jr. 57 Executive Vice President, Chief Financial Officer and Secretary
Mark L. Faupel 43 Vice President, Research & Development
Richard L. Fowler 42 Vice President, Engineering
Robert G. Rothfritz 49 Vice President, Operations
</TABLE>
Except as set forth below, all of the executive officers have been
associated with the Company in their present or other capacities for more than
the past five years. Officers are elected annually by the Board of Directors and
serve at the discretion of the Board. There are no family relationships among
executive officers of the Company.
Mark A. Samuels has served as a member of the Company's Board of
Directors, President and Chief Executive Officer since co-founding the Company
in 1992. Prior to that time, Mr. Samuels was a founder of Laser Atlanta Optics,
Inc., an optical sensor company, where he held the position of President and
Chief Executive Officer until 1992, and was a director until October 1996. While
at Laser Atlanta Optics, Mr. Samuels focused on the development of commercial
and medical applications of electro-optics. Mr. Samuels earned a B.S. in Physics
and an M.S. (Electrical Engineering) from Georgia Institute of Technology.
Keith D. Ignotz has served as a member of the Company's Board of
Directors and Chief Operating Officer since co-founding the Company in 1992.
Formerly, Mr. Ignotz was President of Humphrey Instruments SmithKline Beckman
(Japan), President of Humphrey Instruments GmbH (Germany), and Senior Vice
President of Allergan Humphrey Inc., a $100 million per year ophthalmic
diagnostic company. Mr. Ignotz is a member of the board of directors of Vismed,
Inc. (Dicon), an ophthalmic diagnostic products company, and Pennsylvania
College of Optometry. Mr. Ignotz earned a B.A. in Sociology from San Jose State
University and an M.B.A. from Pepperdine University.
Thomas H. Muller, Jr. has served as the Company's Chief Financial
Officer since joining the Company in December 1996. Prior to that time, Mr.
Muller was President of Muller & Associates, an operational and financial
management services company and Chief Financial Officer of Nurse On Call, Inc.
From 1984 to 1992, Mr. Muller was Chief Financial Officer of HBO & Company, a
provider of information systems and services to the health care industry. Mr.
Muller is a member of the board of directors of NetBank, Inc., an internet
banking company. Mr. Muller earned a B.I.E. in Industrial Engineering from
Georgia Institute of Technology and an M.B.A. from Harvard Business School.
Mark L. Faupel, Ph.D. has served as the Company's Vice President of
Research and Development since August 1998. Dr. Faupel joined the Company on
February 2, 1998 in the capacity of Vice President, New Product Development.
Prior to that time, Dr. Faupel was an independent consultant to the Company and
other firms in cancer research. From 1987-
-52-
<PAGE> 53
1997, Dr. Faupel held various positions with Biofield Corporation, a medical
device company in the area of breast cancer detection, a firm which he cofounded
and served as Vice President, Director of Science and Vice President, Research
and Development.
Richard L. Fowler has served as the Company's Vice President of
Engineering since joining the Company in February 1996. Prior to that time, Mr.
Fowler worked for Laser Atlanta Optics, Inc., where he held the positions of
President and Chief Executive Officer from August 1994 to February 1996. As Vice
President of Engineering for Laser Atlanta Optics from 1992 to 1994, Mr. Fowler
managed the development of three laser sensor products. Mr. Fowler earned a B.S.
in Electrical Engineering from University of Texas.
Robert G. Rothfritz, has served as the Company's Vice President of
Operations since joining the Company in July 1996. From 1994 to 1996, Mr.
Rothfritz was Director of Manufacturing for Atlantic Envelope Company, a
National Service Industries, Inc. division, and from 1993 to 1994, he was a
Senior Manager, Manufacturing Systems Leader for Ethicon EndoSurgery, a Johnson
& Johnson division. From 1988 to 1992, Mr. Rothfritz was Vice President,
Operations for the Oral Care Division of Bausch & Lomb, Inc. Mr. Rothfritz
earned a B.S. in Mechanical Engineering from Georgia Institute of Technology.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
-53-
<PAGE> 54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) The following documents are filed as a part of this Report:
1. FINANCIAL STATEMENTS
2. FINANCIAL STATEMENT SCHEDULE.
Schedules are not included in this Annual Report on Form 10-K,
as they are not required or the information required to be set
forth therein is included in the Consolidated Financial
Statements on Notes thereto.
3. EXHIBITS
Refer to (c) below.
(B) REPORTS ON FORM 8-K
The Company was not required to and did not file any Current
Reports on Form 8-K during the quarter ended December 31,
1998.
(C) EXHIBITS
The exhibits listed on the accompanying Index to Exhibits are
filed as part hereof, or incorporated by reference into, this
Report.
-54-
<PAGE> 55
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
Laser Atlanta Optics, Inc. 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.
10.11A(1)* License Agreement, dated May 7, 1991, between Georgia Tech
Research Corporation and Laser Atlanta Optics, Inc.
10.11B(1) Agreement for Purchase and Sale of Technology, Sale, dated
January 16, 1993, between Laser Atlanta Optics, Inc. and the
Company.
10.11C(1) First Amendment to License Agreement, dated October 19, 1993,
between Georgia Tech Research Corporation and the Company.
10.12(1) Clinical Research Study Agreement, dated July 22, 1993,
between Emory University and the Company.
10.13A(1)* Development and License Agreement, dated December 2, 1994,
between Boehringer Mannheim Corporation and the Company.
10.13B(1)* Supply Agreement, dated January 5, 1996, between Boehringer
Mannheim and the Company.
10.14(1) Sponsored Research Agreement, No. SR95-006, dated May 3, 1995,
between University of Texas, M.D. Anderson Cancer Center and
the Company.
10.15(1) Sole Commercial Patent License Agreement, dated May 4, 1995,
between Martin Marietta Energy Systems, Inc. and the Company.
10.16A(1) License Agreement, dated November 22, 1995, between Joseph R.
Lakowicz, Ph.D. and the Company.
10.16B(1) Amendment of License Agreement, dated November 28, 1995,
between Joseph R. Lakowicz, Ph.D. and the Company.
10.16C(1) Second Amendment to License Agreement, dated March 26, 1997,
between Joseph R. Lakowicz, Ph.D. and the Company.
10.16D Third Amendment to License Agreement, dated November 20, 1998,
between Joseph R. Lokawicz, Ph.D. and the Company.
10.16E** Fourth Amendment to License Agreement, dated November 20,
1998, between Joseph R. Lakowicz, Ph.D. and the Company.
10.17(1) License and Joint Development Agreement, dated March 1, 1996,
between NonInvasive-Monitoring Company, Inc., Altea
Technologies, Inc. and the Company.
10.18(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.
10.19A(1)* Purchasing and Licensing Agreement, dated June 19, 1996,
between Respironics and the Company.
10.19B** Amendment to Purchasing and Licensing Agreement, dated
October 21, 1998 between Respironics and the Company.
10.20(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.
10.21A(1)* Research and Development and License Agreement, dated October
10, 1996, between Abbott Laboratories and the Company.
10.21B(3)* Letter Agreement, dated December 22, 1997, between Abbott
Laboratories and the Company.
10.22A(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.
10.24** Development and Commercialization Agreement, dated December
31, 1998, between Welch Allyn, Inc. and the Company
11.1 Calculation of earnings per share.
21.1 Subsidiaries of the Registrant.
</TABLE>
<PAGE> 56
<TABLE>
<S> <C>
23.1 Consent of independent accountants.
24.1 Power of Attorney (included at signature page.)
27.1 Financial Data Schedule. (for SEC use only)
</TABLE>
- ------------
* Confidential treatment granted for portions of these agreements.
** Confidential treatment requested for portions of these agreements.
(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 the quarter 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 26, 1998.
<PAGE> 57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 the City of
Norcross, State of Georgia, on the 31st day of March 1999.
SPECTRX, INC.
By: /s/ MARK A. SAMUELS
-----------------------------
Mark A. Samuels
Chairman and Chief Executive
Officer
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Mark A. Samuels and Thomas H.
Muller, Jr., jointly and severally, his or her attorneys-in-fact, and each with
the power of substitution, for him or her in any and all capacities, to sign any
amendments to this Annual Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ---------------------------------------------------- -----------------------
<S> <C> <C>
/s/ MARK A. SAMUELS Chairman, Chief Executive Officer and Director March 31, 1999
- --------------------------------------- (Principal Executive Officer)
Mark A. Samuels
/s/ THOMAS H. MULLER, JR. Executive Vice President and Chief Financial March 31, 1999
- --------------------------------------- Officer (Principal Financial and Accounting
Thomas H. Muller, Jr. Officer)
/s/ KEITH D. IGNOTZ President, Chief Operating Officer and Director March 31, 1999
- ---------------------------------------
Keith D. Ignotz
/s/ CHARLES G. HADLEY Director March 31, 1999
- ---------------------------------------
Charles G. Hadley
/s/ EARL R. LEWIS Director March 31, 1999
- ---------------------------------------
Earl R. Lewis
</TABLE>
<PAGE> 1
EXHIBIT 10.16.D
THIRD AMENDMENT
TO LICENSE AGREEMENT
This Third Amendment to License Agreement ("Third Amendment") is entered
into as of the 20th day of November, 1998, by and between Joseph R. Lakowicz,
Ph.D., an individual having an address of 10037 Fox Den Road, Ellicott City,
Maryland 231042 ("DR. LAKOWICZ") and SpectRx, Inc., a Delaware corporation,
having its principal office at 6025A unity Drive, Norcross, Georgia 30071
("SRX").
W I T N E S S E T H:
WHEREAS, DR. LAKOWICZ and SRX entered into a License Agreement executed
November 22, 1995, as amended by an Amendment of License Agreement dated
November 28, 1995 and a Second Amendment to License Agreement dated March 26,
1997 (such agreement as so amended, the "Agreement");
WHEREAS, DR. LAKOWICZ and SRX desire to further amend the Agreement
pursuant to Paragraph 12.7 of the Agreement;
NOW, THEREFORE, for and in consideration of $1.00 and other good and
valuable consideration and the covenants and agreement contained herein, the
parties hereto agree to amend the Agreement as follows:
A. By deleting Paragraph 12.13 in its entirety and substituting the
following therefor:
"12.13 Research Agreement. Until the amount paid to DR. LAKOWICZ in any
calendar year pursuant to Article 3 of this Agreement exceeds two hundred fifty
thousand dollars (US$250,000.00), SRX (either itself or through an Affiliate)
agrees to fund a research program under the direction of DR. LAKOWICZ at the
University of Maryland, a future employer of DR. LAKOWICZ, or any other
organization designated by DR. LAKOWICZ, at a level not less than two hundred
fifty thousand dollars (US$250,000.00) per year. Notwithstanding the foregoing,
in respect of the calendar year ending December 31, 1998, DR. LAKOWICZ agrees to
accept, on his behalf, on behalf of the University of Maryland or otherwise as
DR. LAKOWICZ so directs, contemporaneously with the execution and delivery of
this Third Amendment, eighty thousand dollars ($80,000.00) in cash, and an
option, evidenced by a Non-Qualified Stock Option Agreement entered into
contemporaneously herewith between FluorRx, Inc. ("FluorRx") and DR. LAKOWICZ,
for twenty-eight thousand nine hundred and ten (28,910) shares of Series B
Preferred Stock of FluorRx as authorized by FluorRx Board of Directors, with
such option having an exercise price per share of forty cents ($.40), all in
full and complete satisfaction of the obligation of SRX under this Section 12.13
in respect of such year. In addition, and notwithstanding the foregoing, in
respect of the calendar year ending December
<PAGE> 2
31, 1999, DR. LAKOWICZ agrees to accept, on his behalf, on behalf of
the University of Maryland or otherwise as DR. LAKOWICZ so directs, a
total of one hundred twenty-five thousand dollars $125,000), payable in
cash in two installments of sixty-two thousand five hundred dollars
($62,500.00) payable on or before each of April 1, 1999 and October 1,
1999, all in full and complete satisfaction of the obligations of SRX
under this Section in respect of such year."
B. By adding the following paragraph 3.9:
"3.9 Additional Compensation. In partial additional compensation for
the rights granted in this Agreement and to provide additional
incentive, and the agreements contained in the Third Amendment, SRX
shall cause FluorRx to issue to DR. LAKOWICZ an additional option,
evidenced by a Non-Qualified Stock Option Agreement entered into
contemporaneously herewith, between FluorRx and DR. LAKOWICZ, for
forty thousand (40,000) shares of Common Stock of FluorRX as
authorized by the FluorRx Board of Directors, with such options
having an exercise price per share of twenty six cents ($.26), and
subject to certain vesting requirements relating to its exercise as
set forth in such option agreement."
IN WITNESS WHEREOF, DR. LAKOWICZ has executed this Third Amendment and
SRX has caused this Third Amendment to be executed by its duly authorized
representative as of the day and year first above written.
Joseph R. Lakowicz, Ph.D.
----------------------------------------
JOSEPH R. LAKOWICZ, Ph.D.
SPECTRX, INC.
BY: Mark A. Samuels
------------------------------------
Mark A. Samuels
President and Chief Executive Officer
<PAGE> 1
EXHIBIT 10.16E
FOURTH AMENDMENT
TO LICENSE AGREEMENT
This Fourth Amendment to License Agreement ("Fourth Amendment") is entered
into as of the 20 day of November, 1998, by and between Joseph R. Lakowicz,
Ph.D., an individual having an address of 10037 Fox Den Road, Ellicott City,
Maryland 21042 ("DR. LAKOWICZ") and SpectRx, Inc., a Delaware corporation,
having its principal office at 6024A Unity Drive, Norcross, Georgia 30071
("SRX").
WITNESSETH:
WHEREAS, DR. LAKOWICZ and SRX entered into a License Agreement executed
November 22, 1995, as amended by an Amendment of License Agreement dated
November 28, 1995, a Second Amendment to License Agreement dated March 26, 1997
and a Fourth Amendment to License Agreement dated November 20, 1998 (such
agreement as so amended, the "Agreement");
WHEREAS, DR. LAKOWICZ and SRX desire to further amend the Agreement
pursuant to Paragraph 12.7 of the Agreement;
NOW, THEREFORE, for and in consideration of $1.00 and other good and
valuable consideration and the covenants and agreement contained herein, the
parties hereto agree to amend the Agreement as follows:
By amending paragraph 3.7 as follows:
(i) Delete from the first sentence thereof "ten (10) percent," and
replace same with "the Applicable Up-Front Percentage (as defined
below); "and
(ii) Add the following to paragraph 3.7:
"As used herein, "Applicable Up-Front Percentage" shall mean, in
respect of any Up-Front License Payment, the percentage indicated
below:
<TABLE>
<CAPTION>
Up-Front License Applicable Up-Front
Payment Percentage
----------------- -------------------
<S> <C>
< $50,000 [*]% *
-
> $50,000 but [*]%, plu *
< $100,000 [*]% for each $5,000 *
- in excess of $50,000
</TABLE>
[*} to be redacted
<PAGE> 2
<TABLE>
<S> <C> <C>
[e.g., Up-Front License
Payment of $65,000 would
have Applicable Up-Front
Percentage of [*]%] *
>$100,000 but [*]%, plus *
<$300,000 [*]% for each $40,000 *
- in excess of $100,000 *
>$300,000 but [*]% *
<$500,000
-
>$500,000 but [*]%, less *
<$700,000 [*]% for each $40,000 *
- in excess of $500,000
>$700,000 but [*]%, less *
<$1,000,000 [*]% for each $60,000 *
- in excess of $700,000 *
>$1,000,000 but [*]%, less *
<$2,000,000 [*]% for each $200,000 *
- in excess of $1,000,000 *
>$2,000,000 [*]% *
</TABLE>
IN WITNESS WHEREOF, DR. LAKOWICZ has executed this Fourth Amendment and SRX
has caused this Fourth Amendment to be executed by its duly authorized
representative as of the day and year first above written.
/s/ JOSEPH R. LAKOWICZ, Ph.D.
------------------------------------------
JOSEPH R. LAKOWICZ, Ph.D.
SPECTRX, INC.
By: /s/ MARK A. SAMUELS
--------------------------------------
Mark A. Samuels
President and Chief Executive Office
[*] to be redacted
<PAGE> 1
EXHIBIT 10.19B
October 21, 1998
Respironics Georgia, Inc.
1255 Kennestone Circle
Marietta, GA 30066
RE: AMENDMENT TO PURCHASING AND LICENSING AGREEMENT
This letter serves to amend certain terms (the "Amendment") of the Purchasing
and Licensing Agreement (the "Agreement") dated June 19, 1996 by and between
Respironics Georgia, Inc., f/k/a/ Healthdyne Technologies, Inc. ("RIGA"), and
SpectRx, Inc. (SpectRx"). Capitalized terms used herein and not otherwise
defined shall have the meaning assigned to such terms in the Agreement.
The parties to this Amendment agree that the Agreement is hereby amended to
include or restate, as the case may be, the following terms and conditions.
1. A number of events have led to this Amendment and will be recited
below. First, RIGA merged with Respironics, Inc. effective February 11, 1998.
Second, the Milestone Deadline set forth in Section 14.5 of the Agreement has
passed without the milestone applicable thereto being achieved. Work to date
indicates that SpectRx will be able to complete a device that measures bilirubin
in accordance with the Revised PRD for use prior to phototherapy
("Pre-Phototherapy device"). The parties have agreed to utilize the
Pre-Phototherapy device in resetting certain milestones.
2. Immediately upon completion of the Pre-Phototherapy device meeting
the revised product requirement document dated September 15, 1998 and attached
hereto as Exhibit A ("Revised PRD"), [*]
3. If SpectRx is unable to achieve the performance goals for the [*] of
the Instrument as set forth in the Revised PRD, SpectRx will then enter into a
second amendment to the Agreement augmenting the marketing license provided for
therein to grant to RIGA an exclusive license (free of license fees and for the
Term set forth in Section 14.1) within the Territory for the following three
software and hardware application [*] to the extent these applications are
developed by SpectRx:
[*]
[*]
[*]
Although SpectRx intends to undertake a reasonable business effort development
program in [*] there is no assurance of success. If successful, [*] are
[*] to be redacted
<PAGE> 2
envisioned to encompass software and possibly a Disposable specific to the
application [*]
Although no license fees are due in respect of the upgrade products, RIGA agrees
to purchase the Instruments, Disposables and Accessories, in accordance with
Section 4 of the Agreement. The parties agree to negotiate price and other
similar terms in good faith, in a like manner to and consistent with the current
provisions contained in the Agreement governing the Instrument. In the event the
Disposable is developed, SpectRx and RIGA will follow the existing formula under
the Agreement for profit and expense distribution on disposable sales.
4. The first sentence of Section 14.5 of the Agreement is deleted and
replaced by the following:
In the event that RIGA or SpectRx has not filed a 510K submission for a
Pre-Phototherapy device and received regulatory clearance necessary for
the marketing and sale of that device in Canada by January 1, 1999
("Revised Section 14.5 Deadline"), RIGA shall have the right to assume
the Commercialization Efforts with respect to the Licensed Products as
set forth in Section 3.1 and on Exhibit E. The Revised Section 14.5
Deadline shall be extended by any delay caused by RIGA: (i ) in the
filing of such 510K submission; (ii) in the work preparatory thereto
required to be performed by RIGA, such as completion of clinical trials
and reporting as to same; or (iii) in the work required to be performed
by RIGA with respect to preparation for sales in Canada. RIGA
acknowledges that both of the conditions set forth in the first
sentence have been satisfied i.e., the referenced 510K submission has
been made and Canadian clearance has been obtained.
5. The transfer price in Section 6.1 is increased from [*]
6. The fourth sentence in Section 3.2 of the Agreement is deleted and
replaced by the following sentence:
Each such milestone payment shall be due and payable only upon
completion of the corresponding milestone as set forth in Exhibit E, as
amended.
7. The word "following" is deleted from the sixth sentence in Section
3.2 of the Agreement.
8. RIGA's address for notices in Section 16-8 of the Agreement is
changed as follows:
RIGA: Respironics, Georgia, Inc.
1255 Kennestone Circle
Marietta Georgia 30066
Attention: Group Vice President
[*] to be redacted
<PAGE> 3
With a copy to: Respironics, Inc.
1501 Ardmore Boulevard
Pittsburgh, Pennsylvania 15221
Attention: General Counsel
9. Everything in Exhibit E including and following the "FDA Approval"
milestone originally scheduled for May 15, 1997 is deleted and replaced by the
Amendment to Exhibit E attached hereto.
10. Exhibit G is deleted in its entirety and replaced by the Amendment
to Exhibit G attached hereto.
11. Except as expressly provided for herein, the Agreement shall remain
in full force and effect and nothing herein shall be construed as a modification
or waiver by RIGA or SpectRx of any rights or remedies under the Agreement.
Please countersign and return one copy of this letter as confirmation of RIGA's
agreement to all statements and amended terms herein.
Sincerely,
SPECTRX, INC.
- ---------------------------------
Mark Samuels
President and CEO
Accepted and agreed to:
RESPIRONICS GEORGIA, INC.
- ---------------------------------
Name
-----------------------------
Title
----------------------------
[*] to be redacted
<PAGE> 4
AMENDMENT TO EXHIBIT E
REMAINING MILESTONES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Original Estimated Date Revised Estimated Dollars(1) Milestone
Date (In Thousands)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[*] Fourth Qtr/98 [*] FDA approval of pre-phototherapy claim
- ---------------------------------------------------------------------------------------------------------------------------
[*] TBA [*] [*]
- ---------------------------------------------------------------------------------------------------------------------------
[*] TBA [*] Acceptance by RIGA of quantities delivered
pursuant to first purchase order pre-phototherapy
claim
- ---------------------------------------------------------------------------------------------------------------------------
[*] TBA [*] Acceptance by RIGA of quantities delivered
pursuant to first purchase order [*]
- ---------------------------------------------------------------------------------------------------------------------------
[*] TBA [*] First anniversary of acceptance of first purchase
order quantities pre-phototherapy claim delivered
by SpectRx
- ---------------------------------------------------------------------------------------------------------------------------
[*] TBA [*] First anniversary of acceptance of first purchase
order quantities [*] delivered by SpectRx
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------------------
(1) Payment due at time of milestone completion
<PAGE> 5
AMENDMENT TO EXHIBIT G
MINIMUM UNIT SALES
INSTRUMENT
<TABLE>
<CAPTION>
Column A OR Column B
- ---------------------------------------------------------------------------------------------------------------------------
Year after 510K Clearance for Pre-Phototherapy [*]
Pre-Phototherapy device 510K Clearance
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
0-1 [*] [*]
- ---------------------------------------------------------------------------------------------------------------------------
Year 2 [*] [*]
- ---------------------------------------------------------------------------------------------------------------------------
Year 3 [*] [*]
- ---------------------------------------------------------------------------------------------------------------------------
Year 4 [*] [*]
- ---------------------------------------------------------------------------------------------------------------------------
Year 5 [*] [*]
- ---------------------------------------------------------------------------------------------------------------------------
After Year 5 [*] [*]
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The minimum unit sales for the Instrument will be the relevant total under
Column A until, if ever, the [*] has received 510K clearance. Thereafter, the
minimum unit sales shall be the total under Column B.
MINIMUM UNIT SALES DISPOSABLE
RIGA's minimum unit sales for Disposables from SpectRx will be:
Year 2 Following Commercialization: [*]
Year 3 Following Commercialization: [*]
Year 4 Following Commercialization: [*]
Year 5 Following Commercialization: [*]
Year 6 Following Commercialization
and Onward: [*]
-2-
<PAGE> 1
EXHIBIT 10.24
DEVELOPMENT AND COMMERCIALIZATION AGREEMENT
THIS DEVELOPMENT AND COMMERCIALIZATION AGREEMENT (this "Agreement") is
entered into as of the 31st day of December, 1998, by and between SPECTRX, INC.,
a Delaware corporation ("SpectRx") and WELCH ALLYN, INC., a New York corporation
("Welch Allyn") (SpectRx and Welch Allyn are each referred to hereinafter as a
"Party" and collectively as the "Parties").
WITNESSETH:
WHEREAS, SpectRx owns or has rights to intellectual property related to
optical spectroscopy and other intellectual property rights that are applicable
to the diagnosis of cervical lesions and dermatologic lesions;
WHEREAS, Welch Allyn owns or has rights to intellectual property that
are applicable to the visualization of cervical lesions and dermatologic
lesions;
WHEREAS, the Parties desire to jointly develop, design, manufacture,
and market a spectroscopic device and related disposable element for use in the
In Vivo Diagnosis (defined below) of cervical lesions (the "Cervical Product");
WHEREAS, the Parties desire to enter into a joint venture or similar
relationship to effect the manufacture and marketing of the Cervical Product,
subject to Manufacturing and Supply Agreements and Marketing Agreements as
further provided herein;
WHEREAS, the Parties desire to provide Welch Allyn an option to enter
into a subsequent agreement with SpectRx for development and commercialization
of a spectroscopic device and related disposable element for use in the In Vivo
Diagnosis of dermatologic lesions (the "Skin Product");
WHEREAS, SpectRx and Welch Allyn wish to enter into a research and
development program that may result in commercialization of the Cervical Product
while understanding that there are technological and business risks that may not
be overcome in the commercialization effort;
WHEREAS, the Parties desire to set forth in this Agreement the terms
applicable to development and commercialization of the Cervical Product and the
option to collaborate in development and commercialization of the Skin Product;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties hereby agree as
follows:
1
<PAGE> 2
I. DEFINITIONS
The following capitalized terms shall have the meanings given in this
Section. Other capitalized terms in this Agreement that are not defined below
but that are defined in this Agreement parenthetically, within quotations, shall
have such meanings.
1.1 "ACCOUNTING SERVICES PROVIDER" means that Party or a Third Party
selected by the Management Committee to serve the Parties as the "Accounting
Services Provider," who shall be responsible for creating and maintaining the
Profit and Loss Statement.
1.2 "APPLIED RESEARCH PHASE" means the joint research to be carried out
by the Parties specifically to prove the preliminary clinical and technical
feasibility of the Cervical Product. The Applied Research Phase, which commenced
prior to the Effective Date, shall end with the completion of a preliminary
engineering package and a preliminary clinical feasibility assessment report for
the Cervical Product.
1.3 "BUDGET" shall have the meaning set forth in Section 6.1(A) hereof.
1.4 "CASH EXPENDITURE EQUALIZATION PROCEDURE" shall mean the procedure
set forth in Section 6.2 hereof.
1.5 "CERVICAL PRODUCT" shall have the meaning set forth in the Recitals
hereto, and shall include, unless the usage thereof dictates otherwise, the
Disposable for such Product.
1.6 "DERIVED TECHNOLOGY" means Developed Patent Rights, Developed
Copyrights, Developed Trademarks and Trade Dress Rights and Developed Technical
Information (as those terms are defined in Section 1.7 hereof) that are derived
from or result as an improvement or other modification to either SpectRx
Intellectual Property or Welch Allyn Intellectual Property.
1.7 "DEVELOPED TECHNOLOGY" means any Developed Patent Rights, Developed
Copyrights, Developed Trademark and Trade Dress Rights, and Developed Technical
Information, all whether registrable or not, issued or pending, that do not
exist as of the Effective Date but that are jointly developed by the Parties, or
by a single Party in performance of its services provided for in the Statement
of Work, during the term of this Agreement, where such terms have the following
meanings, respectively:
(A) "Developed Patent Rights" means all rights to inventions,
proposed inventions, and patent applications, including any patents issuing from
such applications, all reissues or extensions thereof to be obtained in this or
any foreign country upon such applications, any divisional, continuation,
continuation-in-part or substitute applications that may be filed upon such
applications and any patents issued thereon in this or any foreign country, in
addition to the right to file such applications through the Paris Convention or
the Patent Cooperation Treaty;
(B) "Developed Copyrights" means all copyrights in works,
including, without limitation, product literature, brochures, catalogues,
drawings, advertisements, software, and
2
<PAGE> 3
other written or graphic materials, and all derivative works arising therefrom,
whether or not such copyrights are registered;
(C) "Developed Trademark and Trade Dress Rights" means all
statutory and common law rights in trademarks and the associated good will,
including, without limitation, company names, product names, and logos,
including all federal and state trademark application rights associated with
such marks, as well as rights regarding product shape, color, packaging, and
overall image; and
(D) "Developed Technical Information" means all know-how, data,
trade secrets, discoveries, inventions, product designs, models, prototypes,
schematics, copyrighted works, and technical information (including, without
limitation, ideas, formulas, compositions, inventions (whether patentable or
unpatentable and whether or not reduced to practice), manufacturing and
production processes and techniques, research and development information,
drawings, blue prints, specifications, designs, bills of material, computer
software, and documentation), and embodiments thereof (in whatever form or
medium).
To the extent Developed Technology incorporates or includes SpectRx
Intellectual Property or Welch Allyn Intellectual Property (each as defined
below), or constitutes Derived Technology, such incorporated or included
intellectual property and such Derived Technology shall not be considered
Developed Technology.
1.8 "DEVELOPMENT PHASE" means the joint work to be carried out by the
Parties specifically to develop the Cervical Product for commercialization,
including without limitation, design, engineering, clinical evaluation,
regulatory clearance and all pre-production activity. The Development Phase
shall commence on the completion of the Applied Research Phase and shall end on
the First Shipment Date of the Cervical Product.
1.9 "DISPOSABLE(S)" means a single or multiple use component or
components that are distributed with labeling or instructions identifying it for
use with the Products.
1.10 "EFFECTIVE DATE" means the date of this Agreement set forth in the
first paragraph hereof.
1.11 "EXPENDITURES" means actual cash payments of Project expenses,
that have been approved by the Management Committee specifically or as part of
an approved Budget, made by a Party to Third Parties in bona fide, arms-length
transactions, including compensation of any kind (including benefits) to
employees or independent contractors working on the Project (or on a pro rata
basis to the extent such employees or independent contractors are not engaged
full-time on the Project) and all direct rent expense and other direct fixed or
variable facility usage or Project-related costs or expenses (i.e., utilities,
materials, supplies, travel, etc.), but not including all or any portion of
overhead expenses that a Party would have incurred in the absence of the
Project, such as general administrative expenses.
1.12 "FILING" means any documentation, application, filing,
recordation, registration, or the like perfecting, enhancing or ensuring
proprietary rights to intellectual property under any statute, law, or
governmental rule or regulation, whether U.S. or foreign, including without
3
<PAGE> 4
limitation copyright, trademark, and patent laws.
1.13 "FIRST SHIPMENT DATE" means the date of the first shipment of the
Cervical Product, other than Cervical Products used for clinical studies, after
receipt of regulatory approval in a country, to the extent required, and which
is sold by or on behalf of the Parties to a Third Party. For purposes of Section
15.2, the First Shipment Date will not occur until a minimum aggregate of one
hundred (100) units of Cervical Product have been shipped and sold.
1.14 "IN VIVO DIAGNOSIS" means the process of determining by
examination and analysis, the nature and circumstances of the diseased
condition, in a living organism and the conclusion reached from such a process.
1.15 "LETTER OF INTENT" means that certain Letter of Intent, including
the proposed terms, entered into by the Parties dated October 21, 1998.
1.16 "MANAGEMENT COMMITTEE" shall have the meaning set forth in Section
2.1 hereof, and shall include any successor committee or body established by
agreement of the Parties.
1.17 "MANUFACTURING AND SUPPLY AGREEMENTS" shall have the meaning set
forth in Section 8.5 hereof.
1.18 "MARKET OPPORTUNITY" means for a given country, the total expected
retail sales (measured in the U.S. Dollars) for a Product during both
introduction into the market and thereafter, in such country, all as determined
using customary methods of market research, particularly as employed for
innovative products, as mutually and reasonably determined by the Parties.
1.19 "MARKETING AGREEMENTS" shall mean the agreements referred to in
Section 9.4 hereof.
1.20 "MILESTONES" means the milestones set forth in the Statement of
Work.
1.21 "NON-PRODUCT FIELD" means all non-In Vivo Diagnosis applications
and all applications using In Vivo Diagnosis of cancer that are not related to
the Products, including, without limitation, colposcopy, video colposcopy,
cancer cell collection devices, endoscopically detectable cancers (e.g.,
colorectal, bladder), phototherapy, electropotential or ionic markers of cancer,
and all in vitro analysis of cells and/or use of biomolecular markers.
1.22 "OPTICS MODULE" means a subassembly which provides a portion of
the system's optical functionality, including excitation, collection and
reference channels. The Module consists of electro-optical components and
detector electronics and may include associated source. The Module requires
power and control signals as inputs and provides the probe opto-mechanical
interface and analog or digital data outputs. The Module as delivered, will be
fully aligned and tested and ready for installation in the final assembly.
1.23 "EQUALIZING PAYMENTS" means the periodic payments to be made by
one Party to
4
<PAGE> 5
the other, in accordance with the Cash Expenditure Equalization Procedure and
the provisions of Sections 6.2 and 6.3 hereof.
1.24 "PRODUCTS" means the Cervical Product and the Skin Product, and
shall include, unless the context of such usage dictates otherwise, the
Disposable in respect of each such Product.
1.25 "PRODUCT FIELD" means the use of spectroscopy without agents,
except for agents that the Management Committee has agreed are required to
enable the Products to perform at an acceptable level for commercial use and
then only to those agents, for In Vivo Diagnosis of cervical lesions and
dermatologic lesions, including the products that constitute the Products.
1.26 "PROFIT AND LOSS STATEMENT" means the special purpose income
statement generated by the Accounting Services Provider in accordance with the
methodology set forth in Exhibit 1.26 attached hereto, which shall serve as the
basis for allocating between the Parties the profits and losses generated from
sales of the Cervical Product.
1.27 "PROJECT" means the design, development, completion, manufacture,
marketing, sale, and support of the Cervical Product, together with any other
obligations of the Parties contained herein.
1.28 "PROPRIETARY INFORMATION" means any technical or non-technical
information, financial information, compilations, devices, methods, manuals,
business plans, names and lists of actual or potential customers, in any
tangible or intangible form, which is not generally known to the public.
1.29 "SKIN PRODUCT" shall have the meaning set forth in the Recitals
hereto, and shall include, unless the usage thereof dictates otherwise, the
Disposable for such Product.
1.30 "SPECIFICATIONS" means the specifications of the Cervical Product
as such specifications may be initially or later established or are later
revised or modified, from time to time, pursuant to Section 3.2 hereof.
1.31 "SPECTRX'S INTELLECTUAL PROPERTY" means SpectRx's Patent Rights,
SpectRx's Technical Information and SpectRx's Copyrights embodied in or relating
to the Products, which have the following meanings, respectively:
(A) "SpectRx's Patent Rights" means SpectRx's rights in the
issued patents and pending patent applications owned by SpectRx listed on
Exhibit 1.31(A); any divisionals, reissues, reapplications, continuations,
continuations-in-part, substitutes, foreign counterparts, or any patents issued
thereon in a foreign country; and any other patents or patent applications
containing claims necessary to make, use and sell Products in possession of
SpectRx or based on inventions reduced to practice by SpectRx before the
Effective Date.
(B) "SpectRx's Technical Information" means all know-how,
data, trade secrets, discoveries, inventions, product designs, information
(including, without limitation, ideas, formulas, compositions, inventions
(whether patentable or unpatentable and whether or not
5
<PAGE> 6
reduced to practice), manufacturing and production processes and f techniques,
research and development information, computer software, and documentation), and
embodiments thereof (in whatever form or medium) of SpectRx, and that are known
to or possessed by SpectRx as of the Effective Date; and
(C) "SpectRx's Copyrights" means SpectRx's rights in works,
including, without limitation, literature, brochures, catalogues, drawings,
advertisements, software, and other written or graphic materials, and all
derivative works arising therefrom, which are known to or possessed by SpectRx
as of the Effective Date.
1.32 "STATEMENT OF WORK" means the schedule of Milestones and
responsibilities, including payments to be made by one Party to the other, that
comprise the Applied Research Phase and the Development Phase for the
development of the Cervical Product, as such Statement of Work may be initially
or later established or is later revised or modified from time to time pursuant
to Section 3.2 hereof. The Statement of Work for the Cervical Product containing
a schedule in respect of the Applied Research Phase, and a general description
of the Development Phase is attached hereto as Exhibit 3.1.
1.33 "THIRD PARTY" means any individual, corporation, partnership,
trust or other business organization or entity, and any other recognized
organization other than the parties hereto and their affiliates.
1.34 "US PRIMARY CARE" means all front line primary care providers
(MD's, DO's, Physician's Assistants, Nurse Practitioners, etc) including family
medicine, internal medicine, pediatricians, obstetricians and gynecologists,
plastic surgeons and any other general care providers in the United States and
Canada. US Primary Care shall not include, however, dermatologists and their
assistants such as physician assistants and nurse practitioners.
1.35 "WELCH ALLYN'S INTELLECTUAL PROPERTY" means Welch Allyn's Patent
Rights, Welch Allyn's Technical Information and Welch Allyn's Copyrights
embodied in or relating to the Products, which have the following meanings,
respectively:
(A) "Welch Allyn's Patent Rights" means Welch Allyn's rights
in the issued patents and pending patent applications owned by Welch Allyn
listed on Exhibit 1.35(A); any divisionals, reissues, reapplications,
continuations, continuations-in-part, substitutes, foreign counterparts, or any
patents issued thereon in a foreign country; and any other patents or patent
applications containing claims necessary to make, use and sell Products in
possession of Welch Allyn or based on inventions reduced to practice by Welch
Allyn before the Effective Date.
(B) "Welch Allyn's Technical Information" means all know-how,
data, trade secrets, discoveries, inventions, product designs, information
(including, without limitation, ideas, formulas, compositions, inventions
(whether patentable or unpatentable and whether or not reduced to practice),
manufacturing and production processes and techniques, research and development
information, computer software, and documentation), and embodiments thereof (in
whatever form or medium) of Welch Allyn, and that are known to or possessed by
Welch Allyn as of the Effective Date; and
6
<PAGE> 7
(C) "Welch Allyn's Copyrights" means Welch Allyn's rights in works,
including, without limitation, literature, brochures, catalogues, drawings,
advertisements, software, and other written or graphic materials, and all
derivative works arising therefrom, which are known to or possessed by Welch
Allyn as of the Effective Date.
II. MANAGEMENT COMMITTEE
2.1 MANAGEMENT COMMITTEE. The Parties shall establish a management
committee comprised of six (6) primary members, and two (2) alternate members,
with each Party designating three (3) primary members and one (1) alternate
member (the "Management Committee"). Each Party's alternate member shall have
the right to attend all meetings, but shall vote only in the absence of a
primary member designated by that Party. Should a vacancy arise at any time on
the Management Committee, the Party appointing the member leaving the Management
Committee shall appoint such member's successor.
(A) Meetings; Action. The Management Committee shall meet not less
than once every quarter on a date designated by the Management Committee and on
the request of a Party as provided in Section III. The location of such
Management Committee meeting shall alternate between SpectRx's office and Welch
Allyn's office, unless otherwise agreed to by the Parties. Any action by the
Management Committee shall require the approval of a majority of its members,
with a quorum of six members required for convening a meeting of the Management
Committee. Members may participate in and vote during a Management Committee
meeting via means of telecommunication, so long as all members can
simultaneously hear each other, participate in discussions held during the
meeting, and are in possession of any tangible deliverables or submissions being
evaluated.
(B) Responsibilities. The Management Committee shall have
responsibility for the following activities:
(1) establishing the rules and procedures governing the
proceedings of the Management Committee;
(2) establishing the Budget and further related approvals
as provided in Section 7.1 hereof;
(3) approving modifications to the Statement of Work or
to the Specifications;
(4) defining functional requirements and performance
criteria;
(5) planning logistics and strategy;
(6) selecting distribution channels;
(7) regularly reporting to management of both Parties,
including monthly progress reports and monthly reports of Expenditures against
Budget;
(8) managing the preparation and approval of the Profit
and Loss Statement and ongoing management in respect thereof;
(9) determining action to be taken by the Parties to
protect Developed Technology; and
(10) performing the other activities assigned to the
Management Committee pursuant to this Agreement, or as otherwise undertaken by
the Management Committee.
7
<PAGE> 8
III. STATEMENT OF WORK; SPECIFICATIONS
3.1 GENERAL. Attached hereto as Exhibit 3.1 is the Statement of Work
for the Cervical Product containing a schedule in respect of the Applied
Research Phase and a general description of the Development Phase.
3.2 MODIFICATIONS AND ADDITIONS TO THE STATEMENT OF WORK. Due to the
preliminary nature of the information currently available to the Parties, it is
anticipated that the Statement of Work will, from time to time, require
modification in light of developments pursuant to the Project, including without
limitation modification of the schedule for completion of Milestones,
delineation of tasks to be completed for each Phase of the Project, and revision
of the estimate of Expenditures. Further, the Specifications will be prepared
subsequent to the Effective Date, and from time to time thereafter, may require
revision to make them technologically and commercially feasible and reasonable
in light of the progress of the Project. Either Party may propose and submit to
the Management Committee a modification to the Statement of Work, the initial
Specifications, or a revised version of the Specifications and request a meeting
of the Management Committee to consider the proposal. The Management Committee
shall act on the foregoing matters submitted to it in accordance with its
operating rules and procedures and this Agreement.
3.3 COMPLETION OF MILESTONES. The Management Committee shall determine
when Milestones have been satisfactorily completed in accordance with the
Statement of Work. Substantial completion of all material requirements of a
Milestone shall be deemed to be satisfactory completion of the Milestone for
purposes of: 1) determining when payments associated with the Milestone are due,
and 2) initiating the next phase of the Project as set forth in the Statement of
Work. Upon completion of a Milestone by the Party(ies) responsible for its
performance, such Party(ies) shall notify and request a meeting of the
Management Committee and submit for its evaluation all deliverables required by
the Statement of Work. The Management Committee will evaluate the deliverables
using the criteria / requirements provided in the Statement of Work and act on
the matter of acceptance or rejection of the Milestone deliverables in
accordance with its operating rules and procedures and this Agreement.
3.4 MANAGEMENT COMMITTEE PROCEDURES. The Management Committee shall
schedule a meeting to act on matters submitted to it pursuant to Sections 3.2
and 3.3 within fifteen (15) days of receipt of a request for meeting. A majority
vote of a quorum of the Management Committee shall be sufficient for accepting,
rejecting, or otherwise acting on any matter submitted to the Management
Committee. If the Management Committee rejects any proposal relating to the
Specifications, Statement of Work, or the Project, or any request for acceptance
of a Milestone, it shall state its rationale, specify deficiencies to be
addressed in a resubmittal, and schedule the time for resubmittal. If the
Management Committee fails to take action because of a deadlock in the voting of
members, the following shall apply:
(A) Partisan Deadlock. If deadlock has been created by all
Management Committee members designated by one Party voting affirmatively and
all members designated by the other Party dissenting (a "Partisan Deadlock"),
the dissenting Party shall, within 15 days after occurrence of the Partisan
Deadlock, prepare a written rationale for its decision. The
8
<PAGE> 9
rationale shall specify any deficiencies that must be remedied or further
information that must be submitted to procure the dissenter's affirmative vote.
Each Party shall use commercially reasonable efforts to cooperatively address
the issues identified by the dissenting Party and product and submit to the
Management Committee any additional deliverables, or revisions to deliverables,
requested by the dissenting Party. The Management Committee shall convene a
meeting to reconsider the matter, within forty-five (45) days of occurrence of
the Partisan Deadlock, in light of all additional material submitted to the
Management Committee. If the Management Committee fails to break the deadlock or
extend the time for reconsideration at the second meeting, the Party seeking
approval of the Management Committee may thereafter submit the matter for
Dispute Resolution in accordance with Section 18.1 of this Agreement.
(B) Non-Partisan Deadlock. If deadlock has been created by
non-partisan voting of the members of the Management Committee (a Non-Partisan
Deadlock), the Management Committee shall first utilize any applicable internal
procedures in an attempt to break the deadlock. If the Non-Partisan Deadlock is
not resolved within fifteen (15) days, the Management Committee members
designated by each Party will confer with their respective corporate management,
and within 10 days determine the manner in which the unanimous vote of that
Party's Committee members will be cast. If the Non-Partisan Deadlock is not
broken, but rather converted to a Partisan Deadlock, the procedure of Section
3.4 A shall apply.
3.5 ALTERNATE COMMERCIALIZATION. If the Parties mutually determine that
the planned development and commercialization of the Cervical Product is not
feasible, they undertake to pursue with reasonable diligence an exploration of
utilization of the Developed Technology for other applications related to the
diagnosis of cervical lesions, although any decision to pursue same will require
the written mutual agreement of the Parties.
IV. OBLIGATIONS OF WELCH ALLYN DURING APPLIED RESEARCH AND DEVELOPMENT
PHASES
4.1 GENERAL OBLIGATIONS. Welch Allyn shall use all reasonable
commercial efforts to perform the work assigned to it in the Statement of Work,
to cause the Project to meet the Milestones set forth therein, and to develop
the Cervical Product so that it is economically viable for manufacture,
distribution, and sale. Such efforts include the following commitments:
(A) Specified Staffing. Welch Allyn shall devote such staffing to
the Project, through Welch Allyn's own employees and/or Welch Allyn's commitment
of independent contractors, as is reasonably necessary to perform such work.
(B) Contributions and Expenditures. Welch Allyn shall pay one
half of the cost of development of the Cervical Product by making Expenditures
and contractual payments to SpectRx pursuant to this Agreement. The Parties
shall utilize the Cash Expenditure Equalization Procedure described in Section
6.2 of this Agreement to balance and equalize the Expenditures made by each
Party and the contractual payments made between the Parties for development of
the Cervical Product under this Agreement. The parties estimate Welch Allyn's
share of the cost to develop the Cervical Product to be [*] allocated to Phases
1 and 2 of the Applied Research Phase of the Project and [*] allocated to the
Development Phase of the
[*] to be redacted
9
<PAGE> 10
Project, as more specifically described in the Statement of Work.
4.2 WELCH ALLYN CONTRACT PAYMENTS TO SPECTRX FOR THE APPLIED RESEARCH
PHASE. Welch Allyn shall make the following contract payments to SpectRx with
respect to Expenditures made by SpectRx and development of the Cervical Product
performed by SpectRx with respect to the Applied Research Phase of the Project
as described in the Statement of Work:
(A) SpectRx acknowledges receipt from Welch Allyn of [*] as a down
payment toward the contract payments for Phase 1 of the Applied Research Phase;
(B) Welch Allyn shall pay SpectRx [*] contemporaneously with
execution of this Agreement; [*] for Expenditures incurred by SpectRx
prior to December 31, 1998, in performance of Phase 1 of the Applied Research
Phase, and [*] for progress achieved as of the Effective Date in
development of the Cervical Product;
(C) Welch Allyn shall pay SpectRx [*] Dollars [*] as an advance
against performance of work under Phase 2 of the Applied Research Phase of the
Project upon completion of Phase 1 of the Applied Research Phase (determined in
accordance with Section 3.3 of this Agreement and the Statement of Work);
(D) Welch Allyn shall pay SpectRx the amount calculated by
application of the following formula upon receipt of a report from SpectRx
documenting that development of the Cervical Product has progressed to the
mid-point of Phase 2 of the Applied Research Phase. The amount of this payment
shall equal [*] of the difference between: (i) the total remaining Expenditures
then estimated to be incurred for the second half of Phase 2 of the Applied
Research Phase (estimated as of the Effective Date to be [*] and (ii)
Expenditures then estimated to be incurred by Welch Allyn in respect of its
performance of the second half of Phase 2 of the Applied Research Phase.
All contractual payments from Welch Allyn to SpectRx described
in this Section shall be subject to the balancing / equalization process
described as the Cash Expenditure Equalization Procedure.
4.3 EXPENDITURES AND CONTRACT PAYMENTS FOR THE DEVELOPMENT PHASE.
Welch Allyn shall, during the Development Phase of the Project, make
Expenditures for development of the Cervical Product or contractual payments to
SpectRx for development of the Cervical Product in such amounts and at such
times as shall be set forth in the Statement of Work. All such Expenditures and
contractual payments shall be subject to the balancing / equalization process
described as the Cash Expenditure Equalization Procedure defined in Section 6.2
of this Agreement.
4.4 TECHNOLOGY ACCESS FEE PAYABLE BY WELCH ALLYN TO SPECTRX. In
addition to the Expenditures and contract payments set forth above, Welch Allyn
shall pay to SpectRx [*] in installments as set forth in the Statement of Work
in exchange for and as additional consideration due SpectRx for access to
[*] to be redacted
10
<PAGE> 11
SpectRx's Intellectual Property. This technology access fee shall not be taken
into account in respect of, or provide Welch Allyn any credit to be used for,
the Cash Expenditure Equalization Procedure.
V. OBLIGATIONS OF SPECTRX DURING APPLIED RESEARCH AND DEVELOPMENT PHASES
5.1 GENERAL OBLIGATIONS. SpectRx shall use all reasonable commercial
efforts to perform the work assigned to it in the Statement of Work, to cause
the Project to meet the Milestones set forth therein, and to develop the
Cervical Product so that it is economically viable for manufacture, distribution
and sale. Such efforts include the following commitments:
(A) Specified Staffing. SpectRx shall devote such staffing to
the Project through SpectRx's own employees and/or SpectRx's commitment of
independent contractors as is reasonably necessary to perform such work.
(B) Contribution and Expenditures. SpectRx shall pay one half
of the cost of development of the Cervical Product by making Expenditures or
contractual payments to Welch Allyn for work completed as provided in the
Statement of Work as revised from time to time, subject to the Cash Expenditure
Equalization Procedure. The Parties estimate SpectRx's share of the cost to
develop the Cervical Product to be [*] allocated to Phases 1 and 2 of the
Applied Research Phase of the Project and [*] allocated to the Development Phase
of the Project, as more specifically described in the Statement of Work. SpectRx
is presently not expected to make any contract payments to Welch Allyn with
respect to the Applied Research Phase of the Project.
VI. BUDGETS, EXPENDITURES AND PAYMENTS DURING THE PROJECT
6.1 CALENDAR YEAR BUDGETS.
(A) As soon as possible after the execution of this Agreement,
the Management Committee shall meet and establish a budget for calendar year
1999 relating to the Applied Research Phase and the Development Phase (for any
year, the "Budget"). Budgets shall also be established for years after
commercialization of the Cervical Product under this Agreement if the Parties
have not previously formed a joint venture to carry out the commercialization.
Thereafter, on or before December 1st immediately preceding the beginning of
each calendar year, commencing with the calendar year 2000, the Management
Committee shall determine the Budget for the succeeding calendar year relating
to the development or commercialization of the Cervical Product. Notwithstanding
the foregoing, the Management Committee may at any time amend the Budget.
(B) Each Budget may provide annual limits, monthly limits,
task-specific, or other "line-item" limits on Expenditures or subject some or
all Expenditures to further specific approval by the Management Committee. These
limitations may include limitations as to use of personnel and staffing, and in
any event shall not permit Expenditures with respect to non-technical personnel
and related support staff during the Applied Research Phase of the Project,
[*] to be redacted
11
<PAGE> 12
except for personnel performing specifically-approved project management and
market research functions. Expenditures for market research, marketing, and
preparation for manufacturing incurred prior to the first commercial sale of the
Cervical Product shall be included in the Budget(s) for the Development Phase of
the Project as determined by the Management Committee. No Expenditure shall be
subject to reimbursement pursuant to the Cash Expenditure Equalization Procedure
unless it is consistent with the Budget therefor and any specific further
approval required by the Management Committee.
6.2 CASH EXPENDITURE EQUALIZATION PROCEDURE. The Parties shall employ
the Cash Expenditure Equalization Procedure to share equally the operating
expenses and cost of capital assets employed in the Project on a periodic basis.
The Cash Expenditure Equalization Procedure generally shall be based on the
methodology defining the Profit and Loss Statement (see Exhibit 1.26), omitting
revenue. During the Applied Research Phase and Development Phase of the Project,
each party will report to the Accounting Services Provider on a monthly basis
its Expenditures and capital employed and receipt of contract payments under
this Agreement. The Accounting Services Provider will maintain accounts for each
of the Parties documenting each Party's Expenditures, receipts of contract
payments under this Agreement, and the net balance of the accounts. As provided
in Section 6.4, the Accounting Services Provider periodically shall compare the
net balances of the Parties' accounts and determine the Equalizing Payment
payable from the Party with the lower net account balance of Expenditures to the
other Party to equalize the balances of the accounts.
6.3 CASH EXPENDITURE EQUALIZATION PROCEDURE AFTER COMMERCIALIZATION.
Subsequent to commercialization of the Cervical Product and prior to formation
by the Parties of a joint venture to manufacture and sell the Cervical Product,
the Parties shall equally share the revenues and expenses of making and selling
the Cervical Product in accordance with the methodology defining the Profit and
Loss Statement, and subject to the provisions of this Agreement relating to
Manufacturing and Marketing the Cervical Product. Upon commercialization of the
Cervical Product, the Cash Expenditure Equalization Procedure shall be expanded
include revenues generated from sales of the Cervical Product. The parties shall
report to the Accounting Services Provider, on a periodic basis to be agreed
upon by the Parties, the revenue, operating expenses, cost of capital assets and
working capital, and other items required by and in accordance with the
methodology required for the Profit and Loss Statement. The Accounting Services
Provider will post to each party's account the items reported by the Parties
under this Section and calculate the net balance of each Party's account. As
provided in Section 6.4, the Accounting Services Provider periodically shall
compare the net balances of the Parties' accounts and determine the Equalizing
Payment payable from the Party with the greater account balance of net revenue
to the other Party to equalize the balances of the accounts.
6.4 INVOICING; PAYMENTS.
(A) The Accounting Services Provider will determine the Equalizing
Payments as of the end of each quarter, and additionally at 1) the midpoint of
Phase 2 of the Applied Research Phase, and 2) the end of Phase 2 of the Applied
Research Phase. After each determination of an Equalizing Payment, the
Accounting Services Provider shall notify the Parties respectively, to invoice
and pay the Equalizing Payments. The Party to whom an Equalizing Payment is due
shall invoice the other Party, and submit supporting documentation in
12
<PAGE> 13
reasonable detail. Invoices shall be payable within thirty (30) days after the
date of the invoice to a bank account to be specified in the invoice.
(B) Each Party shall maintain, in accordance with sound accounting
practices, accounting records to document all Expenditures and other items of
revenue and expense required by the Profit and Loss Statement methodology which
are reported to the Accounting Services Provider for purposes of the Cash
Expenditure Equalization Procedure. The records shall be retained for at least
three (3) years. Each Party may audit the other Party's records upon reasonable
notice, solely for the purpose of verifying the items reported to the Accounting
Services Provider. Records for any designated period may not be audited more
than once.
6.5 MONTHLY REPORTS. Within twenty (20) days after the end of each
month, each Party shall provide the other Party with a written report describing
all matters material to the submitting Party's work required under the Statement
of Work, including the submitting Party's prospects for completing the work
necessary for meeting the next unfulfilled Milestone. Such report shall also
include a statement certified by a responsible official of the submitting Party
showing, in reasonable detail, all Expenditures made by such Party for the
Project during the previous month.
6.6 JOINT VENTURE. During the Development Phase, the Parties' agree to
enter into good faith negotiations for entering into a joint venture or other
relationship for purposes of carrying out the commercialization of the Cervical
Product. Any such relationship will permit each Party to realize one-half of the
revenue, expenses, profits, and losses of the joint venture or other
relationship and incorporate the principles of joint management.
6.7 OWNERSHIP OF PROPERTY ACQUIRED FOR THE PROJECT. Capital assets and
equipment purchased with Expenditures will be jointly owned by the Parties,
including without limitation, capital assets and equipment purchased during
Phase 1 of the Applied Research Phase.
VII. INTELLECTUAL PROPERTY
7.1 SPECTRX'S INTELLECTUAL PROPERTY. SpectRx shall remain the sole
owner of (i) SpectRx's Intellectual Property, which SpectRx possessed as of the
Effective Date, whether or not the subject matter of such intellectual property
is related to the Product Field, (ii) Developed Technology that was developed
solely by SpectRx (and not in performance of its services hereunder as provided
for in the Statement of Work), and (iii) Derived Technology in respect of
SpectRx's Intellectual Property. Developed Technology shall not include any of
the foregoing.
7.2 WELCH ALLYN'S INTELLECTUAL PROPERTY. Welch Allyn shall remain the
sole owner of (i) Welch Allyn's Intellectual Property, which Welch Allyn
possessed as of the Effective Date, whether or not the subject matter of such
intellectual property is related to the Product Field, (ii) Developed Technology
that was developed solely by Welch Allyn (and not in performance of its services
hereunder as provided for in the Statement of Work), and (iii) Derived
Technology in respect of Welch Allyn's Intellectual Property. Developed
Technology shall not include any of the foregoing.
13
<PAGE> 14
7.3 DEVELOPED TECHNOLOGY. All right, title, and interest in all
Developed Technology created jointly by the Parties through the performance of
work contemplated by this Agreement, whether such technology is related to the
Product Field or a Non-Product Field, shall be jointly owned by the Parties. The
Parties are each entitled to use the Developed Technology in Non-Product Fields
without restriction, and without accounting to each other for profits from such
use.
(A) Cooperation in Protecting Developed Technology. The Parties
shall consult and cooperate with one another through the Management Committee to
make appropriate Filings deemed reasonably necessary to provide legal protection
of Developed Technology. The Management Committee shall determine the scope,
content, claims, and jurisdiction of the Filings. The costs incurred for Filings
shall be deemed Expenditures subject to the Cash Expenditure Equalization
Procedure. Notwithstanding Section 3.4 of this Agreement, either Party may, at
its discretion and expense, File an application with respect to Developed patent
rights, if the Management Committee deadlocks and fails to act to make a joint
Filing in any jurisdiction in which the Party desires protection. In that event,
the other Party shall cooperate with the applicant so that the applicant can
make all Filings necessary to obtain rights to an issued patent. Such
cooperation shall include obtaining assignments from employees, and giving all
reasonable assistance in connection with the preparation and prosecution of any
such patent applications including execution of all instruments or documents
reasonably requested by the applicant.
(B) Employee and Contractor Assignment Agreements. Each Party
agrees that it shall require its employees and independent contractors to enter
into its standard form assignment of inventions and confidentiality agreement, a
copy of which has been provided to the other Party.
(C) Limitation on Use. Notwithstanding the foregoing, should
Welch Allyn decline to participate in development of the Skin Product or if the
Parties do not agree on the Skin Product Contract Terms, the use by Welch Allyn
of the Developed Technology will be limited as provided in Section 10.3 hereof.
(D) Cooperation In Enforcing Developed Technology. The Parties
shall also consult and cooperate with one another through the Management
Committee regarding enforcement of the Developed Technology against infringement
by any Third Parties. Should the Management Committee determine to file a
lawsuit or other claim or enforcement action as to any such infringement
("Enforcement Action"), the costs incurred in respect of same shall be deemed to
be Expenditures subject to the Cash Expenditure Equalization Procedure, and the
proceeds from same, if any, such as judgments, settlements, royalties or the
like ("Enforcement Proceeds") shall be paid equally to each Party.
Notwithstanding Section 3.4 of this Agreement, either party may, at its
discretion, file and pursue an Enforcement Action, if the Management Committee
deadlocks and fails to act to file and pursue any Enforcement Action which has
accrued. In that event, the costs incurred for the Enforcement Action shall be
paid by the initiating Party only, and shall not be deemed to be Expenditures
subject to the Cash Expenditure Equalization Procedure. All Enforcement Proceeds
shall be paid only to such initiating Party, and the declining Party shall have
no interest or claim to the Enforcement Proceeds.
14
<PAGE> 15
7.4 ACCESS TO SPECTRX AND WELCH ALLYN INTELLECTUAL PROPERTY.
(A) Use Of Intellectual Property In The Project. Each Party
shall make available to the other Party those items of its Intellectual Property
which the recipient Party needs to conduct its work on the Project according to
the Statement of Work, except that no Party shall be obligated to contribute any
Intellectual Property relating to the Cervical Product which is acquired or
reduced to practice after the Effective Date, unless a separate license for such
Intellectual Property on commercially reasonable terms is agreed to by the
Parties. The recipient Party shall return the originals and all copies of
documentation of such Intellectual Property to the contributing Party within
thirty (30) days after the termination of this Agreement.
(B) Use Of Intellectual Property For Commercialization. Upon
entering into any Manufacturing and Supply Agreement or Marketing Agreement,
each Party (a "licensing Party") will provide the other Party (or its
subcontractor), to the extent reasonably necessary for performance of the
relevant Agreement, a non-exclusive, royalty-free license to use the
Intellectual Property of such licensing Party within the territory covered by
any such Manufacturing and Supply Agreement or Marketing Agreement.
7.5 THIRD PARTY INTELLECTUAL PROPERTY. To the extent either Party has,
as of the Effective Date, a license or similar right to use intellectual
property owned by a Third Party which is necessary or desirable to make, use,
and sell the Cervical Product (the "Third Party Intellectual Property"), then
such Party shall use commercially reasonable efforts to obtain a license to use
such Third Party Intellectual Property for such purpose, subject to Management
Committee approval of the terms of the license. A list identifying Third Party
Intellectual Property for each Party is attached hereto as Exhibit 7.5, and each
Party represents and warrants that its list of Third Party Intellectual Property
as well as the copies of agreements related thereto provided to the other Party,
are true, correct and complete. All royalties, license fees based on sales of
products (quantified in price or units), or other similar payments payable to
the Third Party in respect of the Third Party Intellectual Property obtained for
use in the Project ("Third Party License Payments") shall be deemed Expenditures
subject to the Cash Expenditure Equalization Procedure. Third Party License
Payments shall not include minimum royalties or patent or other intellectual
property maintenance expenses required to be paid by a Party for its Third Party
Intellectual Property. Each Party agrees to maintain its Third Party
Intellectual Property Rights to the extent such rights are used by Parties in
respect of the Project, or may reasonably be anticipated to be so used.
7.6 OTHER ACTIVITIES. Subject to the provisions of Article X as to
further agreements as to the Skin Product, each Party retains the right to
perform research, and develop and commercialize products for its own account in
Non-Product Fields.
VIII. MANUFACTURING AND SUPPLY
8.1 EXCLUSIVE MANUFACTURING RIGHTS. Welch Allyn shall have the
exclusive right to manufacture and supply, or direct the manufacture and supply
of, the Cervical Product, other than the [*]. SpectRx will have the
exclusive right to manufacture and supply, or direct the manufacture and supply
of, the [*] for the Cervical Product.
[*] to be redacted
15
<PAGE> 16
(A) Relinquishing Manufacturing Rights. A Party shall
relinquish its exclusive manufacturing rights if it declines to match a
Qualified Offer received by either Party from a Third Party to manufacture the
Cervical Product or the Optics Module within thirty (30) days of receipt of the
Qualified Offer. A Qualified Offer is a written offer that documents in
reasonable detail the following:
1) The Third party offeror must be a qualified, reputable,
ISO 9000 - approved manufacturer;
2) The average price of the Cervical Product or Optics
Module must be at least [*] less than the then-current average price at which
the Cervical Product or Optics Module is being manufactured by a Party pursuant
to this Agreement;
3) The offer must contain terms and conditions, including
without limitation, quality assurance, performance standards, and delivery
capability, at least as favorable as those pursuant to which a Party is
manufacturing the Cervical Product or Optics Module pursuant to this Agreement;
4) The Third Party offeror must not be a direct competitor
of the Parties with respect to the Cervical Product and must agree to customary
confidentiality terms protecting the Parties; and
5) The cost of transferring production must not exceed
the value of the cost savings that would be realized by accepting the Qualified
Offer.
(B) Implementing A Third Party Manufacturer. Disputes
regarding whether an offer is a Qualified Offer shall be resolved by the
Management Committee or the Dispute Resolution provisions of Article XVIII of
this Agreement, as the case may require. Any manufacturing and supply by a Third
Party shall be effected pursuant to a Manufacturing and Supply Agreement. Use of
a Third Party for manufacturing pursuant to this Section shall not modify the
Parties' other obligations under this Agreement.
8.2 MANUFACTURE OF THE DISPOSABLE. The Disposable may be
manufactured by SpectRx, Welch Allyn, or a Third party, based on criteria of
lowest cost while meeting quality expectations as described in Section 8.1 (A).
The Party or Third Party manufacturing the disposable may be changed based on
the procedure for evaluating Qualified Offers described in Sections 8.1 (A) and
8.1 (B).
8.3 MANAGEMENT OF MANUFACTURING AND SUPPLY. If any manufacturing
and supply is to be performed by a Third Party, the Party identifying and
submitting the Third Party's proposal to manufacture and supply shall be
responsible to manage and oversee the Third Party's performance of its
Manufacturing and Supply Agreement, although in any event SpectRx shall manage
and oversee any manufacturing or supply of the Disposable by any Third Party.
8.4 MANUFACTURING MARGINS. The Parties shall agree on a reasonable
manufacturing margin for the Cervical Product, [*], and Disposable (the
"Manufacturing Margin"). The Party that manufactures the Cervical Product, [*],
or Disposable will realize the Manufacturing Margin related thereto without a
corresponding profit allocation to the other Party. In such instances, the
transfer price paid to the Manufacturing Party shall be reported to the
Accounting Services Provider as an Expenditure for cost of goods sold. If a
Third Party manufactures the Cervical Product, [*] or Disposable, the transfer
price paid to such Third Party shall be reported to the Accounting Services
Provider as an Expenditure for cost of
[*] to be redacted
16
<PAGE> 17
goods sold.
8.5 MANUFACTURING OR SUPPLY AGREEMENTS. The terms and conditions,
including price, quality assurance, performance standards, delivery, and other
customary terms and conditions applicable to the manufacture or supply of the
Cervical Product, [*], and Disposable, whether such manufacture or supply is to
be performed by a Party or a Third Party, shall be set forth in an agreement,
consistent with the provisions of this Article 8 and the other provisions of
this Agreement. The form of the Agreement shall be approved by the Management
Committee.
IX. MARKETING
9.1 MARKETING RIGHTS. The Party to whom marketing rights are assigned
for the Cervical Product as to any particular territory shall have the right to
market and sell, or direct the marketing and sale of, the Cervical Product in
such territory, and shall be responsible, using all commercially reasonable
efforts, for effecting or managing such marketing and selling efforts. Marketing
shall include packaging, transportation and distribution of the Cervical
Product, including shipping logistics and collection of receivables generated by
sales of the Cervical Product. The rights described herein are referred to as
the "Marketing Rights."
9.2 ASSIGNMENT OF MARKETING RIGHTS. Welch Allyn shall have exclusive
Marketing Rights for the Cervical Product for the territory [*]. Marketing
Rights for the Cervical Product for remaining territories in the World, shall be
allocated pursuant to the provisions of Section 9.3 hereof.
9.3 MARKETING PLAN. Welch Allyn shall have the initial and ongoing
responsibility to develop and present a marketing and sales plan for the
Cervical Product [*] which it shall revise from time to time and submit to the
Management Committee for its consideration. Such Marketing Plan shall assess the
most effective distribution channels based on the relative strength of the
Parties' respective distribution networks as evidenced by similar products in
distribution, sales force, expertise in market, and forecasts. The Marketing
Rights in any country or region of the World (outside of [*] shall be assigned
between the Parties as determined by the Management Committee (subject to
Section 3.4 of this Agreement regarding deadlock). The Management Committee may
also redirect or modify the assignment of the Marketing Rights, including
without limitation, making selections of Third Parties to conduct or assist in
marketing. The Parties acknowledge that marketing will involve co-branding the
Cervical Product with the trademarks of both Parties. The trademark of the Party
with Marketing Rights to the Cervical Product in the relevant Territory will
have dominance in such branding (the "dominant Party") such that the trademark
of the non-dominant Party shall be proximate to and approximately two-thirds in
size and overall prominence of the trademark of the dominant Party. The
marketing plans to be approved by the Management Committee pursuant to this
Section 9.3 shall include measures of diligence of sales, including forecasts
and minimum sales targets. Third Party marketing research may be employed to
assist in the preparation for such marketing plans and forecasts.
9.4 MARKETING AGREEMENTS. The Parties shall enter into Marketing
Agreements
[*] to be redacted
17
<PAGE> 18
between themselves, or with Third Parties, that shall detail all terms and
conditions relating to marketing and sales efforts, and the payments,
collection, shipping, packaging, delivery, and distribution of the Cervical
Product.
X. OPTION REGARDING THE SKIN PRODUCT
10.1 Feasibility Assessment. During a period estimated to be [*] months
after the Effective Date, SpectRx will use commercially reasonable efforts to
prove the feasibility of the Skin Product. If SpectRx determines that further
efforts to prove feasibility are not warranted, it may discontinue same and
notify Welch Allyn, but if SpectRx thereafter renews its efforts to prove
feasibility at any time before the first to occur of: i) expiration of [*] after
termination of this Agreement and any joint venture formed pursuant to Section
6.6 of this Agreement, or ii) expiration of [*] after the Effective Date of this
Agreement, then Welch Allyn shall have the option to participate in the
development of the Skin Product as provided in this Section. If SpectRx
determines that it has reasonably proved feasibility of the Skin Product it
shall prepare and deliver a submission (the "Feasibility Assessment") to Welch
Allyn. The Feasibility Assessment shall include:
(A) a report in reasonable detail of its feasibility work,
comprised of the items specified in Exhibit 10.1 attached hereto;
(B) a preliminary statement of work for the Skin Product
sufficient to commence the Applied Research Phase (similar to the Statement of
Work for the Cervical Product);
(C) estimates of the Market Opportunity for the Skin Product
in the US Primary Care Market and the total Market Opportunity for the Skin
Product;
(D) a description in reasonable detail of its Expenditures
incurred in respect of proving feasibility and preparing the Feasibility
Assessment (the "Skin Product Feasibility Expenditures"); and
(E) a proposal as to the various terms and conditions
(covering generally the terms and conditions governed by this Agreement as to
the Cervical Product) to which the Parties would be subject and which would
govern development and commercialization of the Skin Product ("Skin Product
Contract Terms").
Welch Allyn shall have [*] to review the Feasibility Assessment and
either accept same, request negotiation of the Skin Product Contract Terms, or
decline to participate in development of the Skin Product.
10.2 Skin Product Contract Terms. If Welch Allyn requests negotiation
of the proposed Skin Product Contract Terms, the Parties will negotiate in good
faith for up to [*] after the request to negotiate unless the Parties agree to
extend the time for completion. If the Skin Product Contract Terms are agreed
upon, the parties shall jointly develop the Skin Product in accordance with the
statement of work therefor including the Feasibility Assessment and subject to
the Skin Product Contract Terms. The Skin Product Contract Terms shall be
consistent with the following: (i) payments required by Welch Allyn shall be
limited to sharing of costs of development of the Skin Product, and no further
technology access fee (see Section 4.4 of this Agreement) shall be required;
(ii) Welch Allyn shall have, at minimum, exclusive rights to market the Skin
Product in the [*]; (iii) costs of
18
[*] to be redacted
<PAGE> 19
developing the Skin Product subsequent to the Feasibility Assessment shall be
allocated between the Parties in the same percentage determined for the
Feasibility Assessment (see Section 10.4); and (iv) the Skin Product shall not
be designed in such a manner as to be precluded from sale in the [*] due to
regulatory requirements, notwithstanding different or lesser requirements for
the dermatology market or foreign primary care markets.
10.3 Effects of No Participation. If Welch Allyn declines to
participate in development of the Skin Product or if the Parties do not agree on
the Skin Product Contract Terms, (i) all Developed Technology created or
developed by SpectRx during Feasibility Assessment for the Skin Product shall be
deemed solely owned by SpectRx, (ii) the non-competition covenant provided for
in Section 12.1 hereof as it relates to the Skin Product shall no longer apply
to the Parties, (iii) Welch Allyn may not use in any manner any of the Developed
Technology to develop or commercialize in any manner, directly or indirectly,
the Skin Product, and (iv) all Skin Product Feasibility Expenditures will be
paid by SpectRx.
10.4 Payments For the Skin Product. If Welch Allyn accepts the
Feasibility Assessment, it shall promptly pay SpectRx a percentage of the Skin
Product Feasibility Expenditures equal to a fraction, the numerator of which is
the estimate of the Market Opportunity for the Skin Product for US Primary Care
and the denominator of which is the total worldwide Market Opportunity, both as
reported in the Feasibility Assessment, but in any event such percentage shall
not be less than [*] nor more than [*]. The total to be paid by Welch Allyn
shall not exceed [*] unless Welch Allyn has given prior approval for total
Expenditures to exceed [*].
XI. CONFIDENTIALITY
11.1 Mutual Duty of Confidentiality.
(A) The Parties shall retain in confidence and not disclose to
any Third Party nor use (except as expressly permitted herein) each other's
Proprietary Information, including but not limited to Proprietary Information
independently acquired during the term of this Agreement, and each others'
marketing concepts and financial concepts related to the Products or the
Project.
(B) In order to faithfully perform their obligations under
this Section, each Party shall limit access to the other Party's Proprietary
Information to only those officers, employees, agents, and independent
contractors who shall have a need to receive or have access to such Proprietary
Information.
(C) The Parties shall not publish any studies, results, or
reports relating to the Products, or reproduce any printed or written
information received from each other without the other's prior written
permission, which permission shall not be unreasonably withheld.
(D) This Article shall not extend to any information or to any
portion of information that (i) is in the public domain or becomes generally
available to the public through no fault of Welch Allyn or SpectRx or (ii)
corresponds to information furnished to Welch Allyn or SpectRx by a Third Party
having a bona fide right to do so.
19
[*] to be redacted
<PAGE> 20
(E) Notwithstanding the foregoing, this Article shall not
restrict publicity or disclosure by any Party, in general terms (and to the
extent confidentiality can reasonably be maintained as to specific Proprietary
Information) of information concerning this Agreement, either in research or
development, financial performance, or otherwise, which is reasonably determined
by such Party to be required to fulfill its disclosure obligations to its
shareholders under applicable securities laws or as otherwise customarily
provided by such Party to its shareholders. To the extent reasonably
practicable, each Party intending to make any such disclosure shall provide the
other Party the opportunity to review such disclosure prior to its issuance and
shall make any reasonable changes requested by the other Party which are not
inconsistent with applicable securities laws.
(F) General public press releases relating to the Project or
this Agreement shall not be issued by either Party unless reviewed by the other
Party prior to issuance, and provided any reasonable changes requested by the
other Party are made which are not inconsistent with applicable securities laws.
XII. COVENANT NOT TO COMPETE AND NON-SOLICITATION
12.1 Covenant Not To Compete. During the term of this Agreement, each
Party agrees that it shall not, anywhere in the world, without the prior written
approval of the other Party, engage, directly or indirectly, in the prosecution
of the Project or commercialization of the Products, or products within the
Product Field (apart from its joint commercialization with the other Party
provided in and pursuant to this Agreement), whether as partner, shareholder,
consultant, agent, independent contractor, trustee, or in any other manner. This
covenant not to compete shall extend for a period of five (5) years after
termination of this Agreement pursuant to Section 15.3 with respect to the Party
in breach of performing this Agreement. Each Party agrees that it shall not
engage in any disparagement, whether direct or indirect, through innuendo or
otherwise, of the other Party or any of its employees, agents, officers,
directors, shareholders, or affiliates.
12.2 Non-Solicitation. During the term of this Agreement and for a
period of two (2) years thereafter, neither Party hereto shall, anywhere in the
world, without the prior written approval of the other Party, solicit or
otherwise encourage any employee, independent contractor or consultant of the
other Party to terminate his or her employment with the other Party or to enter
into employment with any other person, firm or corporation.
12.3 Blue-Penciling. If any provision or part of this Article is held
to be unenforceable because of the duration of such provision or the area
covered thereby, the Parties agree to modify the provision to reduce the
duration or area affected by such provision, or to delete specific objectionable
words or phrases ("blue-penciling"), and such provision shall then be enforced
in its reduced or blue-penciled form.
XIII. WELCH ALLYN'S REPRESENTATIONS AND WARRANTIES
13.1 Welch Allyn hereby represents and warrants that:
(A) Welch Allyn is the owner of all right, title, and interest
in and to Welch
20
<PAGE> 21
Allyn's Intellectual Property, free and clear of all liens, security interests,
encumbrances, financing statements, or other pledges or restrictions;
(B) Welch Allyn is not aware of any challenges to the validity
of Welch Allyn's Intellectual Property; Welch Allyn has the right to license the
same; and Welch Allyn has no knowledge of any infringement by any Welch Allyn
product embodying Welch Allyn's Intellectual Property of any intellectual
property rights owned by any Third Party, or any allegations thereof;
(C) There are no actions, suits, or proceedings, pending or,
to Welch Allyn's knowledge, threatened, that may have an adverse effect on Welch
Allyn's ability to fulfill its obligations under this Agreement;
(D) Welch Allyn is a New York corporation duly formed and
validly existing under the laws of the State of New York; has the power and
authority to own its property and to carry on its business as now conducted or
as presently contemplated; and has full power and authority to execute, deliver
and perform this Agreement;
(E) Welch Allyn's execution, delivery, and performance of this
Agreement: (i) have been duly authorized by all requisite action on the part of
Welch Allyn, including any requisite approval of its board of directors; (ii) do
not violate any provision of law, the certificate of incorporation of Welch
Allyn or any applicable order of any court or other governmental agency; and
(iii) do not breach or conflict with the terms of any agreement, document, or
instrument to which Welch Allyn is a party or which is binding upon Welch Allyn
or its property; and
(F) This Agreement constitutes a legal, valid, and binding
obligation of Welch Allyn, enforceable against Welch Allyn in accordance with
its terms.
XIV. SPECTRX'S REPRESENTATIONS AND WARRANTIES
14.1 SpectRx hereby represents and warrants that:
(A) SpectRx is the sole owner of all right, title, and
interest in and to SpectRx's Intellectual Property, free and clear of all liens,
security interests, encumbrances, financing statements, or other pledges or
restrictions;
(B) SpectRx is not aware of any challenges to the validity of
SpectRx's Intellectual Property; SpectRx has the right to license the same; and
SpectRx has no knowledge of any infringement by any SpectRx product embodying
SpectRx's Intellectual Property of any intellectual property rights owned by any
Third Party, or any allegations thereof;
(C) There are no actions, suits, or proceedings, pending or,
to SpectRx's knowledge, threatened, that may have an adverse effect on SpectRx's
ability to fulfill its obligations under this Agreement;
(D) SpectRx is a Delaware corporation duly formed and validly
existing under
21
<PAGE> 22
the laws of the State of Delaware; has the power and authority to own its
property and to carry on its business as now conducted or as presently
contemplated; and has full power and authority to execute, deliver and perform
this Agreement;
(E) SpectRx's execution, delivery, and performance of this
Agreement: (i) have been duly authorized by all requisite action on the part of
SpectRx, including any requisite approval of its board of directors; (ii) do not
violate any provision of law, the certificate of incorporation of SpectRx, or
any applicable order of any court or other governmental agency; and (iii) do not
breach or conflict with the terms of any agreement, document, or instrument to
which SpectRx is a party or which is binding upon SpectRx or its property; and
(F) This Agreement constitutes a legal, valid, and binding
obligation of SpectRx, enforceable against SpectRx in accordance with its terms.
XV. TERM; TERMINATION; BREACH; REMEDIES
15.1 Term. The term of this Agreement will begin on the Effective Date
and continue indefinitely, notwithstanding the expiration of any patents
licensed hereunder, until it is terminated pursuant to this Article or by mutual
written agreement of the Parties. Should the Parties terminate this Agreement by
such agreement the covenant not to compete contained in Section 12.1 shall not
apply, and the agreement shall provide for the other effects of termination.
15.2 Termination Due To Deadlock On Certain Matters. If the Parties are
not able to resolve a dispute regarding modifying the Statement of Work,
establishing or modifying Specifications, or satisfactory completion of
Milestones, as set forth in Sections 3.2 and 3.3 hereof respectively, by a
majority decision of the Management Committee or pursuant to Dispute Resolution
as defined in Section 18.1 hereof, then, unless each Party agrees to the
contrary within ten (10) days of conclusion of Dispute Resolution, the matter
will be submitted to arbitration in accordance with the procedures of Section
18.2 hereof. The decision of the arbitrator shall be non-binding on the Parties.
SpectRx shall have thirty (30) days after receipt of the arbitrator's written
decision to elect to be bound by the arbitrator's decision or to terminate this
Agreement subject to the terms and conditions of this Section.
(A) General Terms and Conditions. If this Agreement is terminated
pursuant to this Section the following provisions shall govern: (i) both Parties
shall be entitled to use the jointly-owned Developed Technology, including
access to information, documents, prototypes, materials and other such items
that are necessary to utilize the Developed Technology; (ii) the noncompetition
covenant contained in Section 12.1 hereof shall not apply; and (iii) all
Equalizing Payments accrued prior to the effective time of such termination will
remain due and payable, all in accordance with the Cash Expenditure Equalization
Procedure.
(B) Royalties and Payments. If this Agreement is terminated
pursuant to this Section and one Party commercializes the Cervical Product
(embodying the Developed Technology), as defined by occurrence of the First
Shipment Date (the Developing Party), while the other Party does not
commercialize the Cervical Product (the Non-Developing Party), the Developing
Party shall make the payments described herein to the Non-Developing Party, upon
written request containing a certification that the Non-Developing Party has
ceased efforts to
22
<PAGE> 23
commercialize the Cervical Product, and provided that any preconditions have
been satisfied.
(1) If this Agreement is terminated subsequent to
acceptance of the engineering document package by Welch Allyn and payment of the
[*] initial installment of the Technology Access Fee, then the Developing Party
shall pay to the Non-Developing Party an annual royalty ("Contingent Royalty"),
to be paid within 60 days of the end of each calendar year, equal to the
percentage of net sales of the Cervical Product designated on Exhibit 15.2 B (1)
attached hereto received by the Developing Party in commercialization of the
Cervical Product for the relevant year. Net sales means gross sales less
returns, customary trade discounts, and separately stated amounts for freight,
insurance, excise taxes , and tariffs. If the Developing Party discontinues
commercialization of the Cervical Product accrued but unpaid Contingent
Royalties shall be paid, and Contingent Royalties shall cease on termination of
sales of the Cervical Product.
(2) In addition to the Contingent Royalty, the Developing
Party will make payments to the Non-Developing Party in an amount determined by
the date of termination of this Agreement in accordance with the schedule on
Exhibit 15.2 B (1). The amount of the payment will be made in two installments;
one payable within 30 days of the occurrence of the First Shipment Date and one
payable within one (1) year from that date; provided, however, that if the
Developing Party discontinues commercialization of the Cervical Product prior to
the payment of the second of such installments, the second installment shall be
eliminated and canceled.
(3) If the Non-Developing Party commercializes the
Cervical Product (embodying the Developed Technology), as defined by occurrence
of the First Shipment Date, subsequent to sending notice and certification to
the Developing Party that it had ceased efforts to commercialize the Cervical
Product, the Non-Developing Party will thereupon repay to the Developing Party
all installment payments and Contingent Royalties described in this Section, and
no such further payments will be due to either Party.
15.3 Remedies For Breach. In the event of a material breach of this
Agreement by either Party, the other Party may, at its option, pursue any or all
of the following remedies after twenty (20) days' written notice describing the
breach:
(1) So long as the breach continues, the non-breaching Party
may perform or cause to be performed by a Third Party all or any part of the
obligations that the breaching Party has failed to timely perform, and in that
event, the breaching Party shall reimburse the non-breaching Party upon demand
for any and all reasonable costs, expenses and other charges of any kind
reasonably incurred by the non-breaching Party or paid to another party in
connection with the substituted performance;
(2) Discontinue making any further payments that may be
required hereunder to the breaching Party (subject to resumption upon cure of
the breach, including payment of discontinued payments) and offset against any
obligations owed to the breaching Party any sums payable to the breaching Party;
(3) Assert a claim for damages or enforce specific
performance; and
23
[*] to be redacted
<PAGE> 24
(4) Terminate this Agreement; provided, however, that termination
may be made pursuant to this Section only after the non-breaching Party has
given not less than sixty (60) days' prior written notice (in lieu of the twenty
(20) days' notice provided above) to the breaching Party, specifying such breach
and stating that the Agreement is to be terminated if the breaches are not cured
within the sixty (60) day period. The 60-day period may be extended up to an
additional one hundred and twenty (120) days if and so long as the Party in
breach has commenced cure of the breach within the 60-day period and
continuously and diligently pursues cure during and after such period.
15.4 Effects Of Termination For Breach. In the case of termination
pursuant Section 15.3: (i) the breaching party will provide the terminating
Party a non-exclusive, worldwide, royalty-free (except for Third Party License
Payments) license to use the breaching party's Intellectual Property and Third
Party Licensed Intellectual Property for the development, design, use,
manufacturing and marketing of the Cervical Product, such license to be in a
form containing customary provisions as reasonably proposed by the terminating
Party, including access to documents and similar provisions, and (ii) Section
12.1 shall survive termination of this Agreement but only in favor of the
terminating Party against the breaching Party.
15.5 Remedies Cumulative. All remedies provided hereunder, at law and
in equity, are cumulative.
15.6 Survival; Certain Effects of Termination.
Articles X, XI, XIII, XIV, XVI, XVII, and XVIII hereof and
Sections 7.1, 7.2, 7.3, and 12.2 shall survive termination of this Agreement
whether pursuant to Section 15.2 or Section 15.3 hereof.
XVI. LIMITATION OF LIABILITY AND REMEDIES
16.1 Liability Limitations. Except for Third Party Liability arising
under Article XVII, in no event shall either Party be liable for indirect,
incidental, penal, consequential, or other similar damages arising out of this
Agreement.
16.2 Exclusive Remedies. The remedies set forth in this Agreement shall
constitute the sole and exclusive remedies of the Parties hereunder, and the
Parties shall not avail themselves of any other remedies, whether in equity or
at law, except that either Party may seek injunctive relief and/or damages for
violation of Article XII.
XVII. INDEMNIFICATION
17.1 By Welch Allyn. Welch Allyn shall indemnify, defend, and hold
SpectRx, its directors, employees, agents, representatives, and licensors
harmless from and against all claims, causes of action, settlement costs
(including, but not limited to, reasonable attorney fees and expenses), losses
or liabilities ("Liabilities") of any kind (i) that are asserted by a Third
Party (including, without limitation, product liability claims) to the extent
arising from the development, manufacture, sale, or use of the Cervical Product,
to the extent arising out of or
24
<PAGE> 25
attributable to any negligent act or omission or willful misconduct exclusively
on the part of Welch Allyn, its employees, agents, or representatives or arising
from any other theory of liability (except to the extent such Liabilities arise
from SpectRx's directors', employees', agents' or representatives' negligence or
willful misconduct); or (ii) to the extent arising from a breach of a
representation or warranty in Section 13.1.
17.2 By SpectRx. SpectRx shall indemnify, defend, and hold Welch Allyn,
its directors, employees, agents, representatives, and licensors harmless from
and against all Liabilities of any kind (i) that are asserted by a Third Party
to the extent arising from the development, manufacture, sale, or use of the
Cervical Product, to the extent arising out of or attributable to any negligent
act or omission or willful misconduct exclusively on the part of SpectRx, its
directors, employees, agents, or representatives or arising from any other
theory of liability (except to the extent such Liabilities arise from Welch
Allyn's directors', employees', agents' or representatives' negligence or
willful misconduct); or (ii) to the extent arising from a breach of a
representation or warranty in Section 14.1.
17.3 Reimbursable Liabilities. To the extent a Liability asserted by a
Third Party and incurred by a Party (including, without limitation, a product
liability claim) is not attributable to any independent negligent act or
omission or willful misconduct of a Party (and thus not subject to
indemnification pursuant to Section 17.1 or Section 17.2 hereof), but rather
results from the joint activity of the Parties pursuant to this Agreement, or
activities provided for in any Manufacturing and Supply Agreement or Marketing
Agreement, then such Liability shall be deemed to be an Expenditure which shall
be subject to the Cash Expenditure Equalization Procedure. The Parties shall
presume, absent clear and convincing evidence to the contrary, that any
Liability asserted by a Third Party and incurred by a Party shall be
attributable to the joint activity of the Parties or otherwise contemplated by
this Agreement.
17.4 Conditions of Indemnification. If either Party expects to seek
indemnification under this Article, such Party shall promptly give notice to the
indemnifying Party of the basis for such claim of indemnification. If
indemnification is sought as a result of any Third Party claim or suit, the
Party seeking indemnification shall send notice to the indemnifying Party within
fifteen (15) days after receiving notice of the Third Party claim or suit, or
within a longer time period which does not materially prejudice the rights of
the indemnifying Party. Each Party shall cooperate fully with the other Party in
the defense of all such claims or suits. No settlement or compromise shall be
binding on a Party without its prior written consent (which consent will not be
unreasonably withheld) unless such settlement fully releases the Party without
any liability, loss, cost, or obligation to such Party.
XVIII. DISPUTE RESOLUTION
18.1 Decisions and Dispute Resolution. The Management Committee, by
majority vote, shall first attempt to make decisions and resolve disputes about
all matters related to the interpretation, application, and performance of this
Agreement and all other matters pertaining to the Cervical Product or the
Project . If the Management Committee fails to act, then either Party may send
written notice of the decision or dispute to the other Party for informal
resolution between the Parties' respective chief executive officers or their
respective designees (the "Parties' Representatives") within thirty (30) days
after such notice is received ("Dispute Resolution"). If
25
<PAGE> 26
the decision or dispute is not resolved by Dispute Resolution, or if the
Parties' Representatives fail to meet within the thirty (30) day period, the
decision or dispute shall be settled by binding arbitration in accordance with
Section 18.2; provided, however, that the disputes referenced in Section 15.2
relating to deadlock pursuant to Sections 3.2 and 3.3 shall not be submitted to
or settled by binding arbitration pursuant to Section 18.2. Further, any failure
to agree as to alternate commercialization of Developed Technology as referred
to in Section 3.5 hereof shall not be submitted to or settled by binding
arbitration pursuant to Section 18.2.
18.2 Arbitration. Except as specifically provided in Section 18.1, if
any deadlock or dispute is not resolved by Dispute Resolution, the decision or
dispute shall be settled by binding arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association, and
judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof, including an injunction. The arbitration shall be
conducted by a single arbitrator in Washington, D.C. The expenses of the
arbitration shall be borne between the Parties as determined by the arbitrator,
except that each Party shall bear the cost of its own experts, evidence, and
legal counsel.
XIX. MISCELLANEOUS
19.1 Addresses and Notice. All notices and other communications
required or desired to be served, given, or delivered hereunder shall be made in
writing or by a telecommunications device capable of creating a written record
and shall be addressed to SpectRx or Welch Allyn to be notified as follows:
(A) If to SpectRx: SpectRx, Inc.
Attention: Chief Executive Officer
6025A Unity Drive
Norcross, GA 30071
Telephone Number: (770) 242-8723
Telecopy Number: (770) 242-8639
(B) If to Welch Allyn: Welch Allyn, Inc.
Attention: Corporate Counsel
4341 State Street Road
P.O. Box 220
Skaneateles Falls, New York 13153-0220
Telephone Number: (315) 685-4100
Telecopy Number: (315) 685-1769
or, at such other address designated by such Party in a written notice to the
other Party. Notices shall be deemed to have been duly given (i) if delivered
personally or otherwise actually received, (ii) if sent by overnight delivery
service, (iii) if mailed by first class United States mail, postage prepaid,
registered or certified, with return receipt requested, or (iv) if sent by
telecopy for which confirmation of receipt is recorded. Notice mailed as
provided in clause (iii) above shall be effective upon the expiration of three
(3) business days after its deposit in the United States mail, and notice sent
as provided in clause (iv) above shall be effective upon successful
transmission. Notice given in any other manner described in this paragraph shall
be effective
26
<PAGE> 27
upon receipt by the addressee thereof. Changes in addresses, addressees, phone
numbers, and telecopy numbers may be specified by written notice.
19.2 Avoidance of Infringement. In performing services under this
Agreement, both SpectRx and Welch Allyn shall avoid knowingly designing or
developing any items that infringe any patents or other intellectual property
rights of any Third Party. If either Party becomes aware of any possible
infringement in the course of performing work hereunder, it shall immediately
notify the other Party in writing.
19.3 Relationship of the Parties. The relationship of the parties under
this Agreement is that of independent contractors. Nothing contained in this
Agreement shall be construed to constitute the Parties as partners or joint
venturers, or either Party as an agent or employee of the other. Neither Party
has any express or implied right under this Agreement to assume or create any
obligation on behalf of or in the name of the other, or to bind the other Party
to any contract, agreement or undertaking with any Third Party, and no conduct
of the parties shall be deemed to infer such right.
19.4 Section Headings; Exhibits. The section and subsection headings
used herein are for reference and convenience only, and shall not enter into the
interpretation of this Agreement. The exhibits referred to in this Agreement and
attached, or to be attached hereto, are incorporated herein by reference.
19.5 Required Approvals. Where agreement, approval, acceptance, or
consent by either Party is required by any provision of this Agreement, such
action shall not be unreasonably delayed or withheld.
19.6 No Waiver. No delay or omission by either Party in exercising any
right or power occurring upon any noncompliance or default by the other Party
with respect to any of the terms of this Agreement shall impair any such right
or power or be construed to be a waiver thereof. A waiver by either Party of any
obligation to be performed by the other shall not be construed as a waiver of
any succeeding breach of this Agreement. Unless stated otherwise, all remedies
provided for in this Agreement shall be cumulative and in addition to any
remedies available at law, in equity, or otherwise.
19.7 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of Georgia, excluding its conflict of laws.
19.8 Entire Agreement. This Agreement and the other agreements
specifically referred to herein constitute the entire agreement between the
Parties, and supercedes all prior agreements or understandings, including
without limitation the Letter of Intent. No change, waiver, or release relating
to this Agreement shall be valid unless it is in writing and executed by the
Party against whom it is to be enforced.
19.9 No Assignment. Neither Party may, without the prior written
consent of the other Party, assign or transfer this Agreement or any obligation
incurred hereunder, except by merger, reorganization, consolidation, or sale of
all or substantially all of such Party's assets.
27
<PAGE> 28
19.10 Severability. If any term or provision of this Agreement shall
for any reason be held invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other term or
provision hereof, and there shall be substituted for the provision at issue a
valid and enforceable provision as similar as possible to the invalid provision.
19.11 Force Majeure.
(A) Delay or failure on the part of either Party in performing
its obligations under this Agreement shall not subject such Party to any
liability to the other if such delay or failure is caused by or results from
acts such as but not limited to acts of God, fire, explosion, flood, drought,
war, riot, sabotage, embargo, strikes or other labor trouble, or compliance with
any law, order or regulation of any government entity acting under color of
right.
(B) Upon occurrence of an event of force majeure, the affected
Party shall promptly notify the other Party in writing, setting forth the
details of the occurrence, and make every attempt to resume the performance of
its obligations as soon as practicable after the force majeure event ceases. If
such event prevents or will prevent performance of a material provision of the
Agreement by one Party for more than six (6) months, then the other Party may
immediately terminate this Agreement upon written notice to the non-performing
Party, in accordance with Section 15.3 hereof.
SPECTRX, INC. WELCH ALLYN, INC.
By: Mark A. Samuels By: Lew F. Allyn
--------------------------------- ---------------------------------
Mark A. Samuels, Lew F. Allyn
President and Chief Executive Officer Executive Vice President
By: Kelley E. Murphy
---------------------------------
Kelley E. Murphy
Business Manager Endoscopy
28
<PAGE> 29
EXHIBIT 1.26
Profit and Loss Methodology
The Management Committee shall establish the components of the Profit
and Loss Statement. Both parties will be required to track and report expenses
on the same basis. The Accounting Services Provider will record all Cervical
Product revenues and expenses of both parties in the Profit and Loss Statement
which will be reported to Welch Allyn and SpectRx on a quarterly basis or more
frequently, depending on each Party's specific needs. This statement will
determine Adjusted Operating Profits and Losses which are defined as; Net sales
(net of returns and allowances) less all operating costs directly attributable
to the Project. Costs attributable to the Project will include all
variable/directly assignable manufacturing costs, selling/marketing costs,
research and development costs, and an appropriate allocation of indirect costs
(manufacturing, selling, and administrative expense). These indirect costs of
manufacturing, selling and administration attributable to the Cervical Product
will be estimated and expensed through the Profit and Loss Statement. SpectRx's
and Welch Allyn's allocations will be agreed to by the Parties during the annual
budgeting process during the fourth quarter of the year preceding the budget
year. The Adjusted Operating Profit and Loss statement will reflect the profit
or loss generated by the Project. Adjusted Operating Profits And Losses will be
shared equally by Welch Allyn and SpectRx. The Accounting Services Provider will
equally distribute the profits to SpectRx and Welch Allyn or equally allocate to
SpectRx and Welch Allyn the losses as part of the Cash Expenditure Equalization
Procedure.
29
<PAGE> 30
EXHIBIT 1.31(A)
SpectRx Patents and Patent Applications
[*]
[*] To be redacted
<PAGE> 31
EXHIBIT 1.35(A)
Welch Allyn Patents and Patent Applications
Issued Patents
<TABLE>
<CAPTION>
Patent No. Patent Title
<S> <C>
Des.391,360 COLPOSCOPE WITH A SWING ARM SUPPORTING FIXTURE
Des.395,084 VIDEO COLPOSCOPE WITH VERTICAL POLE SUPPORTING FIXTURE
5,840,012 DIAGNOSTIC INSTRUMENT SUPPORTING SYSTEM
</TABLE>
Pending Applications
<TABLE>
<CAPTION>
Serial No. Patent Title
<S> <C>
29/062,355 VIDEO COLPOSCOPE
08/748,374 DIAGNOSTIC INSTRUMENT ILLUMINATION SYSTEM
08/700,299 APPARATUS AND METHOD FOR VIDEO COLPOSCOPE WITH ELECTRONIC GREEN FILTER
</TABLE>
31
<PAGE> 32
EXHIBIT 3.1
Statement of Work
[*]
[*] To be redacted
32
<PAGE> 33
EXHIBIT 7.5
Third Party Intellectual Property
SpectRx:
[*]
Welch Allyn: None
[*] To be redacted
33
<PAGE> 34
EXHIBIT 10.1
Activities and Other Items Re: Report on Feasibility of Skin Product
1. Preliminary market assessment report.
2. Preliminary listing of customer based performance and functional
requirements.
3. Initial technical feasibility report based on literature review.
4. Initial intellectual property report.
5. Core team, infrastructure, staffing and responsibilities report.
6. Preliminary device prototype design report.
7. Identification of initial clinical site for pilot research.
8. Proposed tasks and timelines (Gantt Chart) for project.
9. Report of preliminary laboratory experimentation defining [*]
expected to be found in pigmented lesions.
[*] to be redacted
<PAGE> 35
EXHIBIT 15.2 (B)
The Contingent Royalty percentage and payments referenced in Section
18.5(D) will be determined on and by reference to the status of the Project at
the time when the Agreement is terminated, as follows:
[*]
[*] to be redacted
35
<PAGE> 1
EXHIBIT 11.1
SPECTRX, INC.
COMPUTATION OF LOSS PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended December 31, 1998 Ended December 31, 1998
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Loss (1,993) (1,507) (5,726) (6,637)
Weighted Average Common Stock 7,737 8,011 4,528 7,926
outstanding during the period
Basic and Diluted
Loss Per Share Basic and Diluted (0.26) (0.19) (1.26) (0.84)
</TABLE>
Page 1
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
FluorRx, Inc., a Delaware Corporation.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K into the Company's
previously filed Registration Statement on Form S-8, File No. 333-34301.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
Atlanta, Georgia
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SPECTRX INC. FOR THE YEAR ENDED DECEMBER 31,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,962
<SECURITIES> 0
<RECEIVABLES> 683
<ALLOWANCES> 0
<INVENTORY> 404
<CURRENT-ASSETS> 6,168
<PP&E> 1,810
<DEPRECIATION> 837
<TOTAL-ASSETS> 7,654
<CURRENT-LIABILITIES> 835
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 6,811
<TOTAL-LIABILITY-AND-EQUITY> 7,654
<SALES> 823
<TOTAL-REVENUES> 1,406
<CGS> 1,626
<TOTAL-COSTS> 1,626
<OTHER-EXPENSES> 8,826
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (462)
<INCOME-PRETAX> (6,637)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,637)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,637)
<EPS-PRIMARY> (0.84)
<EPS-DILUTED> (0.84)
</TABLE>
