<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
----------- -----------
COMMISSION FILE NUMBER: 0-22179
SPECTRX, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 58-2029543
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
6025A UNITY DRIVE
NORCROSS, GEORGIA 30071
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(770) 242-8723
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1)
has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file
such reports) and (2) has been subject to such
requirements for the past 90 days.
YES [X] NO [ ]
The number of issued and outstanding shares of the Registrant's Common
Stock, $0.001 par value, as of June 30, 1999, was 8,027,881.
<PAGE> 2
SPECTRX, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION.................................................. 3
ITEM 1. FINANCIAL STATEMENTS..........................................
BALANCE SHEETS -
DECEMBER 31, 1998 AND JUNE 30, 1999........................... 3
STATEMENTS OF OPERATIONS -
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999...... 4
STATEMENTS OF CASH FLOWS -
SIX MONTHS ENDED JUNE 30, 1998 AND 1999....................... 5
NOTES TO FINANCIAL STATEMENTS................................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 19
PART II. OTHER INFORMATION..................................................... 20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..................... 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................. 20
SIGNATURES..................................................................... 21
EXHIBIT INDEX.................................................................. 22
</TABLE>
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPECTRX, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
(unaudited)
------------ -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash & Cash Equivalents $ 4,962 $ 1,209
Accounts Receivable 683 341
Inventory 404 400
Other Current Assets 119 347
------------ ----------
Total Current Assets 6,168 2,297
PROPERTY & EQUIPMENT, Net of Accumulated Depreciation of $837 and 973 935
$1,006 in 1998 and 1999 respectively -- --
OTHER ASSETS
Other Assets 42 29
Due from related parties 471 485
------------ ----------
Total Other Assets 513 514
------------ ----------
TOTAL ASSETS $ 7,654 $ 3,746
============ ==========
LIABILITIES & STOCKHOLDERS EQUITY
CURRENT LIABILITIES
Accounts Payable $ 436 $ 379
Accrued Liabilities 399 780
------------ ----------
Total Current Liabilities 835 1,159
STOCKHOLDERS' EQUITY
Common Stock 8 8
Additional paid-in-capital 25,761 25,769
Deferred comp (134) (96)
Accumulated deficit (18,785) (23,063)
Notes Receivable from officers (31) (31)
------------ ----------
Total Stockholders' equity 6,819 2,587
------------ ----------
TOTAL LIABILITIES & EQUITY $ 7,654 $ 3,746
============ ==========
</TABLE>
<PAGE> 4
UNAUDITED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SPECTRX
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30,
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUE
Product Sales $ 289 $ 204 289 610
Collaborative agreements 100 100 150 100
------- ------- ------- -------
TOTAL 389 304 439 710
COST OF SALES 461 388 711 743
------- ------- ------- -------
GROSS MARGIN (72) (84) (272) (33)
EXPENSES
Research & development 1,006 1,438 1,975 2,571
Sales & marketing 336 260 572 445
General & administrative 629 707 1,151 1,306
------- ------- ------- -------
Total 1,971 2,405 3,698 4,322
------- ------- ------- -------
Operating (loss) (2,043) (2,489) (3,970) (4,355)
OTHER EXPENSE (INCOME) 142 9 308 11
INTEREST EXPENSE (INCOME) (146) (31) (283) (88)
------- ------- ------- -------
NET LOSS ($2,039) ($2,467) ($3,995) ($4,278)
======= ======= ======= =======
NET (LOSS) PER SHARE
BASIC ($ 0.26) ($ 0.31) ($ 0.51) $ (0.53)
======= ======= ======= =======
DILUTED ($ 0.26) ($ 0.31) ($ 0.51) ($ 0.53)
======= ======= ======= =======
WEIGHTED AVERAGE SHARES
OUTSTANDING
BASIC 7,929 8,025 7,839 8,021
======= ======= ======= =======
DILUTED 7,929 8,025 7,839 8,021
======= ======= ======= =======
</TABLE>
<PAGE> 5
SPECTRX, INC.
UNAUDITED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Six Months
Ended
June 30,
1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ..................................................... $ (3,995) $ (4,278)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ..................... 190 182
Minority Interest in Loss of ..................... (261) 0
FluorRx
Amortization of deferred compensation ............. 38 38
Changes in assets and liabilities:
Accounts receivable ........................ 46 342
Inventory .................................. 0 4
Other assets ............................... (250) (228)
Due from related parties ................... (14) (14)
Accounts payable ........................... (238) (57)
Accrued liabilities ........................ 277 381
-------- --------
Total adjustments ....................... (212) 648
Net cash used in operating activities ... (4,207) (3,630)
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment ............. (214) (131)
-------- --------
Net cash used in investing activities ... (214) (131)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock (net of issuance costs) ........ 96 8
Issuance of Redeemable Convertible Preferred Stock ...... 418 0
-------- --------
Net cash provided by financing activities 514 8
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ........................................ (3,907) (3,753)
CASH AND CASH EQUIVALENTS, beginning of period ............... 12,449 4,962
-------- --------
-------- --------
CASH AND CASH EQUIVALENTS, end of period ..................... $ 8,542 $ 1,209
======== ========
</TABLE>
<PAGE> 6
SPECTRX, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The interim financial statements included herein have been prepared by
the Company without audit. These statements reflect all adjustments, all of
which are of a normal, recurring nature, which are, in the opinion of
management, necessary to present fairly the consolidated financial position as
of June 30, 1999, the consolidated results of operations for the three months
and six months ended June 30, 1998 and 1999, and the consolidated cash flows
for the six months ended June 30, 1998 and 1999. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The accounting policies of the Company continue unchanged from
December 31, 1998. The Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
financial statements be read in conjunction with the December 31, 1998
financial statements and notes thereto included in the Company's Annual Report
on Form 10K.
The results of operations for the six months ended June 30, 1998 and 1999 are
not necessarily indicative of the results to be expected for the full fiscal
year.
2. FLUORRX
In December 1996, SpectRx (the "Company") sublicensed certain
technology to and acquired a 64.8% interest in FluorRx, a corporation organized
for the purpose of developing and commercializing technology related to
fluorescence spectroscopy. The Company's interest in FluorRx, Inc. 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 an as
converted basis) to 47%. Effective with the August 1998 funding, the Company
began accounting for its investment in FluorRx under the equity method of
accounting. In connection therewith, the Company began suspending the equity
losses from its investment in FluorRx. The accompanying Statement of Operations
for the three months and six months ended June 30, 1998 reflect the Company's
54% equity in the loss of FluorRx. The accompanying Statement of Operations for
the six months ended June 30, 1999 exclude $202,000 in losses which reflects
the Company's 47% equity in the loss of FluorRx. Cumulative suspended equity
losses as of June 30, 1999 amount to $993,000.
3. COMPREHENSIVE INCOME
The Company currently has no other Comprehensive Income items as
defined by SFAS No. 130.
4. SUBSEQUENT EVENTS
The Company received a payment of $500,000 in July 1999 in conjunction
with signing new definitive agreements with Roche Diagnostics for Development
and Supply of its diabetes detection product.
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this report which express "belief", "anticipation" or
"expectation" as well as other statements which are not historical fact are
forward looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results or
anticipated results, including those set forth under "Risk Factors" in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in or incorporated by reference into this report. The
following discussion should be read in conjunction with the Company's Financial
Statements and Notes thereto included elsewhere in this report.
OVERVIEW
SpectRx was incorporated on October 27, 1992, and since that date has raised
capital through the sale of preferred stock, issuance of debt securities, the
public 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, Respironics, (a successor to Healthdyne
Technologies, Inc.) and Welch Allyn for its glucose monitoring, diabetes
detection, 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 June 30, 1999, as a result of a subsequent financing, the
Company'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 June 30, 1999, the Company had
an accumulated deficit of approximately $23.1 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 and Respironics resulting from sales of its
glucose monitoring, diabetes detection 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, 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
<PAGE> 8
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.
QUARTER OVERVIEW
In addition to the results from operations discussed below, the Company
announced progress on its continuous glucose monitoring research program in
conjunction with a presentation of data at the American Diabetes Association
annual meeting held in San Diego, California. The clinical results from 280
comparisons of interstitial fluid glucose concentrations collected by SpectRx's
continuous monitoring prototype devices and conventional finger stick blood
glucose concentrations, which showed a high correlation between results, were
presented at the meeting.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998.
General. Net losses increased to approximately $2.5 million during the
three months ended June 30, 1999 from approximately $2.0 million during the same
period in 1998 primarily due to increased research and development costs and a
decrease in interest income. The Company expects similar net losses to continue.
Revenue. The Company has historically only received revenue from
achieving development milestones with one or more of its strategic partners. The
Company began shipping its infant jaundice product to distributors outside of
the United States and Canada during the quarter ended June 30, 1998. The Company
began shipping its infant jaundice product to its distributor in Canada during
the quarter ended September 30, 1998. The revenue decrease to $304,000 for the
quarter ended June 30, 1999 from $389,000 for the same period of 1998, is
primarily due to lower sales in three months ending June 30, 1999 as compared to
the distributor inventory buildup for the start of the Company's BiliCheck
product in 1998.
Cost of Sales. Cost of sales was $388,000 for the three months ended June
30, 1999 versus $461,000 during the same period of 1998. While the cost of sales
increase is directly related to product revenue, a portion of the cost of sales
represents excess capacity production charges. The Company expects excess
capacity to exist for the remainder of this year.
Research and Development Expenses. Research and development expenses
increased to approximately $1,438,000 during the three months ended June 30,
1999 from approximately $1,006,000 during the same period in 1998. The increase
in research and development expenses was primarily due to expansion of research
in glucose monitoring and cancer detection, including increases in the cost to
build prototypes of its developmental products, and a decrease in the amounts
reimbursed by its collaborative partners. The Company expects research and
development expenses to increase in the future as it continues development and
expands clinical trials for its products.
Sales and Marketing Expenses. Sales and marketing expenses decreased to
approximately $260,000 during the three months ended June 30, 1999 from
approximately $336,000 during the same period in 1998. The decrease during this
period as compared to the same period in 1998 is the result of not having the
significant roll out expenses incurred in the first quarter of 1998 due to the
introduction of the BiliCheck. Marketing expenses however, are expected to
increase in the future as BiliCheck sales expand geographically.
General and Administrative Expenses. General and administrative expenses
increased to approximately $707,000 during the three months ended June 30, 1999
compared to the approximately $629,000 incurred during the same period in 1998.
The increase is primarily due to an increase in insurance costs associated with
new product sales, overhead costs associated with research and development
activities and, to a lesser extent, expenses associated with being a public
company. General and administrative expenses are expected to increase in the
future.
<PAGE> 9
Net Interest and Other Income. Net interest and other income increased
to $22,000 during the three months ended June 30, 1999 from $4,000 during the
same period in 1998. This increase results from a combination of two elements:
(1) a decrease in other expense realized from not consolidating FluorRx losses
because the Company's ownership dropped below 50% during the third quarter 1998
and (2) a decrease in interest income to $31,000 for the three months ended June
30, 1999 from $146,000 during the same period during 1998 due to the decrease in
the cash balances during 1999 versus the same period in 1998.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998.
General. Net losses increased to approximately $4.3 million during the
six months ended June 30, 1999 from approximately $4.0 million during the same
period in 1998 primarily due to an increase in research and development
expenses and general and administrative expenses.
Revenue. The Company began shipping its infant jaundice product to
distributors outside of the United States and Canada during the quarter ended
June 30, 1998. The increase in revenue to $710,000 in the six months ended June
30, 1999 versus $439,000 in the same period in 1998 is a result of having
realized product revenue for two quarters of 1999 versus one in 1998.
Cost of Sales. Cost of sales was $743,000 for the six months ended June
30, 1999 versus $711,000 during the same period of 1998. The increase in cost
is due to increased unit sales in 1999; excess capacity changes in production
decreased in 1999 as compared to the same period in 1998.
Research and development expenses. Research and development expenses
increased to approximately $2.6 million during the six months ended June 30,
1999 from approximately $2.0 million during the same period in 1998. The
increase in research and development expenses was primarily due to expansion of
research in continuous glucose monitoring and cancer detection, including
increases in the cost to build prototypes of its developmental products, and a
decrease in the amounts reimbursed by its collaborative partners.
Sales and marketing expenses. Sales and marketing expenses decreased to
approximately $445,000 during the six months ended June 30, 1999 from
approximately $572,000 during the same period in 1998. The decrease was
primarily due to not incurring the level of costs that were associated with the
initial rollout of the Company's infant jaundice product in 1998.
General and administrative expenses. General and administrative expenses
increased to approximately $1.3 million during the six months ended at June 30,
1999 compared to the approximately $1.2 million incurred during the same period
in 1998. The increase is primarily due to an increase in insurance costs
associated with new product sales, overhead costs associated with research and
development activities and, to a lesser extent, expenses associated with being a
public company.
Net interest and other income. Net interest and other income increased to
$77,000 during the six months ended June 30, 1999 from an expense of $26,000
during the same period in 1998. This increase results from lesser interest
income offset by lesser costs associated with the Company's investment in
FluorRx.
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
private sales of its debt and private and public sales of its equity securities.
From October 27, 1992 (inception) through June 30, 1999, the Company received
approximately $25.8 million in net proceeds from sales of its debt and equity
securities. At June 30, 1999, the Company had cash of approximately $1.2 million
and working capital of approximately $1.1 million. The Company completed an
initial public offering of its common stock on July 7, 1997 which resulted in
net proceeds received by the Company, before expenses related to the
transaction, of approximately $14.0 million. The Company currently invests its
excess cash balances primarily in short-term, investment-grade, interest-bearing
obligations until such funds are utilized in operations. Substantial capital
will be required to develop the Company's products, including completing product
testing and clinical trials, obtaining all required United States and foreign
regulatory approvals and clearances, commencing and scaling up manufacturing and
marketing its products. Any failure of the Company's collaborative partners to
fund its development expenditures would have a material adverse effect on the
Company's business, financial condition and results of operations.
During July 1999 the Company and Roche Diagnostics signed new Agreements for the
development and supply of the diabetes detection product. The Company received a
milestone payment of $500,000 at the time of the signing. In addition the
Company received funding related to manufacturing scale up and a purchase order
for initial shipments.
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. Assuming the Company meets its milestones under its
agreements with its strategic collaborators and completes planned new agreements
with those partners, the Company believes that its existing capital resources
will be sufficient to satisfy its funding requirements for at least the next six
months, but may not be sufficient to fund the Company's operations to the point
of commercial introduction of its glucose monitoring product. However, there can
be no assurance that the Company will meet its milestones or receive payments
from its strategic collaborators or that it will enter into new agreements or
receive any related payments. The Company is evaluating a variety of
alternatives for additional funding including its collaborative arrangements.
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.
<PAGE> 11
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.
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 has
significant responsibility 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 under which
Roche Diagnostics has significant responsibility for undertaking or funding the
development, clinical testing, regulatory approval process and sale of the
Company's diabetes detection 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, 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
<PAGE> 12
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.
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 June 30, 1999, the Company had
an accumulated deficit of approximately $23.1 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 was filed with the FDA for clearance to market the Company's
diabetes detection product, however, that notification has been subsequently
withdrawn, with the intention to approach approval by a PMA path. The Company
has not filed any other 510(k) premarket notification for clearance with the
FDA. A 510(k) 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
<PAGE> 13
other modifications that could affect safety and efficacy, additional clearances
or approvals will be required from the FDA. Any request by the FDA for
additional data or any requirement by the FDA that the Company conduct
additional clinical studies or submit to the more rigorous and lengthier PMA
process could result in a significant delay in bringing the Company's products
to market and substantial additional research and other expenditures by the
Company. Similarly, any labeling or other conditions or restrictions imposed by
the FDA on the marketing of the Company's products could hinder the Company's
ability to effectively market its products. Any of the foregoing actions by the
FDA could delay or prevent altogether the Company's ability to market and
distribute its products and could have a material adverse effect on the
Company's business, financial condition and results of operations.
In order for the Company to market its products under development in
Europe and certain other foreign jurisdictions, the Company and its distributors
and agents must obtain required 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 and Respironics
to obtain United States and foreign regulatory approvals and clearances for its
glucose monitoring, diabetes detection 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 detection product, and the Company has licensed this
proprietary technology to Roche Diagnostics pursuant to the Company's
collaborative
<PAGE> 14
arrangement with Roche Diagnostics. The Company has license agreements with
the University of Texas M.D. Anderson Cancer Center ("M.D. Anderson") that give
SpectRx access to one patent related to the Company's infant jaundice product,
and the Company has applied for two patents related to this product. SpectRx has
licensed the one patent and two patent applications to Respironics pursuant to
its collaborative arrangement with that company. In addition, SpectRx has
licensed from Joseph Lakowicz, Ph.D. of the University of Maryland several
granted patents and patent applications related to fluorescence spectroscopy
that it intends to use in its research and development efforts.
There can be no assurance that one or more of the patents held
directly by the Company or licensed by the Company from third parties, including
the disposable components to be used in connection with its glucose monitoring
and infant jaundice products, or processes used in the manufacture of the
Company's products, will not be successfully challenged, invalidated or
circumvented or that the Company will otherwise be able to rely on such patents
for any reason. In addition, there can be no assurance that competitors, many of
whom have substantial resources and have made substantial investments in
competing technologies, will not seek to apply for and obtain patents that
prevent, limit or interfere with the Company's ability to make, use and sell its
products either in the United States or in foreign markets. If any of the
Company's patents are successfully challenged, invalidated or circumvented or
the Company's right or ability to manufacture its products were to be proscribed
or limited, the Company's ability to continue to manufacture and market its
products could be adversely affected, which would likely have a material adverse
effect upon the Company's business, financial condition and results of
operations.
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 and Respironics resulting from sales of its
glucose monitoring, diabetes detection and infant jaundice products,
respectively. The royalties and manufacturing profits that the Company is
expected to receive from each of its collaborative partners depend on sales of
such products. There can be no assurance that the Company, together with its
collaborative partners, will be able to sell sufficient volumes of the Company's
products to generate substantial royalties and manufacturing profits for the
Company. In addition, the Company's profit margins 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.
<PAGE> 15
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 the Company 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 detection, 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 detection 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 detection tests, infant
jaundice and cancer detection products.
A number of competitors, including Johnson & Johnson, Inc. (which owns
Lifescan, Inc.), Roche Diagnostics, 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 against these and other
competitors. In addition, there can be no assurance that the Company's glucose
monitoring, diabetes detection, 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 detection, 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.
<PAGE> 16
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 detection product and, together with Roche
Diagnostics 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 detection 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 detection 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 States 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 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 BiliChek(TM) and BiliCal(TM)
products, there can be no assurance that the Company will be able to
successfully and 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 for any revenues to be received from its
glucose monitoring and diabetes detection 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.
<PAGE> 17
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,
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. Assuming the Company meets its milestones under its
agreements with its strategic collaborators and completes planned new agreements
with those partners, the Company believes that its existing capital resources
will be sufficient to satisfy its funding requirements for at least the next
nine 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. However, there can be no assurance that the Company will meet its
milestones or receive payments from its strategic collaborators or that it will
enter into new agreements or receive any related payments. 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 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.
<PAGE> 18
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 June 30, 1999
approximately 33% 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 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.
<PAGE> 19
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company has not entered into any transactions using derivative financial
instruments and believes its exposure to interest rate risk, foreign currency
exchange rate risk and other relevant market risks is not material.
<PAGE> 20
PART II. OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds
On July 1, 1997, the Company commenced and completed its initial public
offering (the "IPO") of 2,361,699 shares (including 201,699 shares sold by
selling stockholders and including the exercise of the underwriters'
over-allotment option consisting of 160,000 shares) of its Common Stock, $0.001
par value per share at a public offering price of $7.00 per share pursuant to a
registration statement on Form S-1 (file no. 333-80453) filed with the
Securities and Exchange Commission. All of the shares registered were sold.
Hambrecht & Quist LLC and Volpe Brown Whelan & Company, LLC were the managing
underwriters of the IPO. Aggregate gross proceeds to the Company from the IPO
(prior to deduction of underwriting discounts and commissions and expenses of
the offering) were $15,120,000.
The Company paid underwriting discounts and commissions of $1,058,400
and other expenses of approximately $896,000 in connection with the IPO. The
total expenses paid by the Company in the IPO were $1,954,400, and the net
proceeds to the Company in the IPO were $13,165,600.
From June 30, 1997, the effective date of the Registration Statement to
June 30, 1999, the approximate amount of net proceeds used were $5.3 million for
the funding of the development of the Company's infant jaundice and diabetes
detection products, $3.9 million for developing production capacity and
increasing inventory, $2.1 million to develop sales, marketing and distribution
capability and $1.6 million for other internal Research and Development. None of
such payments consisted of direct or indirect payments to directors, officers,
10% stockholders or affiliates of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits listed on the accompanying Index to Exhibits are filed as
part hereof, or incorporated by reference into, this Report.
(b) Reports on Form 8-K
The Registrant filed no Current Reports on Form 8-K during the quarter
ended June 30, 1999.
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in Norcross, Georgia.
SPECTRX, INC.
Date: August 13, 1999 By: /S/ THOMAS H. MULLER, JR.
-------------------------------
Thomas H. Muller, Jr.
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
<PAGE> 22
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(4) Third Amendment to License Agreement, dated November 20, 1998, between Joseph R. Lakowicz, Ph.D. and
the Company.
10.16E(4)** 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(4)** 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(4)** Development and Commercialization Agreement, dated December 31, 1998, between Welch Allyn, Inc. and
the Company.
10.25A** Development and License Agreement, dated July 13, 1999, between Roche Diagnostics Corporation and the Company.
10.25B** Supply Agreement, dated July 13, 1999, between Roche Diagnostics Corporation and the Company.
11.1 Calculation of earnings per share.
</TABLE>
<PAGE> 23
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
12.1(4) Calculation of ratios.
21.1(4) Subsidiaries of the Registrant.
23.1(4) Consent of independent accountants.
24.1(4) 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 this agreement.
(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.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998, filed
March 30, 1999.
<PAGE> 1
AMENDED AND RESTATED DEVELOPMENT AND LICENSE AGREEMENT
THIS AGREEMENT is entered into and made effective as of the 13th day of
July, 1999, by and between ROCHE DIAGNOSTICS CORPORATION, an Indiana corporation
having a principal place of business at 9115 Hague Road, Indianapolis, Indiana
46250 ("Roche Diagnostics"); and SPECTRX, INC., a Delaware corporation having a
principal place of business at 6025A Unity Drive, Norcross, Georgia 30071
("SpectRx").
WITNESSETH:
WHEREAS, SpectRx and Boehringer Mannheim Corporation, n/k/a Roche
Diagnostics Corporation, entered into a Development and License Agreement dated
December 2, 1994 (the "1994 Development Agreement") for the purpose of
developing a non-invasive diabetes screening instrument as originally envisioned
by such parties;
WHEREAS, the parties wish to amend and restate the 1994 Development
Agreement in respect of the non-invasive diabetes screening instrument developed
to date (the "Device"), which amended and restated agreement will supersede the
1994 Development Agreement;
WHEREAS, certain know-how relating to a method and apparatus using
noninvasive instrumentation to measure molecular changes in human lenses for the
purpose of detecting diabetes is owned by Georgia Tech Research Corporation
("GTRC") and licensed exclusively to SpectRx pursuant to a License Agreement
dated as of May 7, 1991, between GTRC and Laser Atlanta Optics, Inc., which was
assigned to SpectRx on January 16, 1993, and amended on October 19, 1993 (the
"GTRC License");
WHEREAS, SpectRx has applied its know-how ("Know-How") to develop a
device to detect diabetes in humans and has built prototype devices and has
conducted clinical trials of such devices;
WHEREAS, Roche Diagnostics is in the medical diagnostics business and
has experience and expertise in the marketing of medical diagnostics products,
and desires to assist SpectRx in completion of the funding of the development of
the Device to the extent indicated herein and obtain worldwide exclusive
marketing rights to same;
NOW THEREFORE, in consideration of the premises and mutual agreements
expressed herein, the parties agree as follows:
1.0 DEFINITIONS
1.1 "Affiliate" shall mean, with respect to either party, any corporation,
partnership or other business entity that now or in the future
controls, is controlled by, or is under common control with, such
party. "Control" shall mean the direct or indirect ownership of fifty
percent (50%) or more of the
<PAGE> 2
voting interest in, or a fifty percent (50%) or more interest in the
income of, such corporation or other business entity, or such other
relationship as, in fact, constitutes actual control. Not withstanding
the foregoing, Genentech, Inc., shall not be deemed an Affiliate of
Roche Diagnostics.
1.2 "Device" means any non-invasive instrument and improvements thereto
developed by, for or with SpectRx that uses the Know How that measures
changes in human lenses or other structures of the human eye for the
qualitative detection of diabetes for screening purposes or for any
other application related to diabetes.
1.3 "Field" shall mean applications involving the non-invasive
determination of information about diabetes from the eye, including
diabetes screening, determining the duration of diabetes in a patient
and for any other applications related to diabetes.
1.4 "Know-How" shall mean technical information known to SpectRx related to
making and using the Device and also any and all intellectual property
owned or controlled by SpectRx that, in the absence of the licenses
contained herein would be infringed by the making, selling or using of
the Device. Know-How includes, without limitation, trade secrets and
Confidential Information of SpectRx; the design of the Device; any
applicable copyrights in documentation; information, including without
limitation non-public information licensed to SpectRx under the GTRC
License; US Patent 5,582,168 and US Patent 5,203,328 (the "Screening
Patents"); the US Patent Application internally referred to at SpectRx
as SPRX017 (the "Duration Patent Application"); any continuations,
continuations-in-part, divisionals and reissues of such patents and
patent application; and any foreign counterparts of such patents and
patent application.
1.5 "Product Launch" shall mean the earlier of:
(i) the date upon which Roche Diagnostics has received
delivery of a total of two hundred and fifty (250)
Devices purchased pursuant to the Supply Agreement
and FDA Regulatory Clearance for US sales has been
issued (or an FDA panel has reviewed the Device
application and given a favorable indication of
approval and both parties agree that such FDA
Regulatory Clearance is imminent), or
(ii) the date that is 18 months from the Agreement date,
if Roche Diagnostics is not using best efforts to
diligently pursuing FDA Clearance by pursuing all
recommendations requested by the FDA for the
submission including but not limited to completing
all clinical studies and data analysis, and preparing
all requested information for submittal to the FDA.
1.6 "Supply Agreement" shall mean that certain amended and restated supply
agreement for the purchase and sale of Devices of even date herewith
between SpectRx and Roche Diagnostics, as amended or supplemented by
agreement of the parties from time to time.
2.0 TERMINATION OF 1994 DEVELOPMENT AGREEMENT
The parties hereto agree that the 1994 Development Agreement is hereby
superseded in its entirety, and of no further force or effect,
including without
<PAGE> 3
limitation, any terms thereof that are stated to, or would otherwise,
survive a termination or expiration of such agreement, and that no
party has any remaining rights or obligations thereunder.
3.0 RIGHTS GRANTED BY SPECTRX AND ROYALTIES
3.1 In consideration of the payments set out in Section 4.1, below, and
Sections 4.1 and 4.2 of the Supply Agreement, and coming into effect
only after full payment thereof (the "License Effective Date") by Roche
Diagnostics to SpectRx, SpectRx hereby grants to Roche Diagnostics,
subject only to the terms and conditions set forth herein, a worldwide,
exclusive license in the Field to sell and market the Device (the
"Marketing License"). SpectRx may not, except as provided for in this
Agreement, sell, market or distribute, or give any third party rights
to sell, market or distribute any non invasive instrument developed by,
for or with SpectRx that competes with the Device in the Field.
3.2 The Marketing License shall remain exclusive (as provided for in
Section 3.1 hereof) for so long as Roche Diagnostics meets the minimum
volume requirements set forth on Exhibit B (or, in the event Roche
Diagnostics acquires the Manufacturing License (described below), the
Manufacturing License and the Marketing License shall remain exclusive
for so long as Roche Diagnostics meets the minimum royalty requirements
set forth on Exhibit B) and for so long as Roche Diagnostics does not
distribute an instrument that competes with the Device in the Field.
Should such minimum volumes not be met (or, in the event Roche
Diagnostics has acquired the Manufacturing License, should such minimum
royalties not be maintained), or should Roche Diagnostics distribute an
instrument that competes with the Device in the Field, the Marketing
License (and, in the event Roche Diagnostics has acquired the
Manufacturing License, the Marketing License and Manufacturing License)
shall become non-exclusive and shall be further limited to a license to
market and sell on a non-exclusive basis the Device into the managed
care, corporate account and government markets, and not permit Roche
Diagnostics to market or sell the Device into any and all other
markets, including, for example, the eyecare market. In such event,
Roche Diagnostics agrees to cooperate with SpectRx in enabling SpectRx
to obtain any government approvals or applications for approval
necessary for SpectRx to sell the Device in such countries where Roche
Diagnostics has sold or planned to sell the Device prior to the date
the Marketing License becomes non-exclusive.
3.3 While the Marketing License is in effect, and during the term of the
Supply Agreement, should Roche Diagnostics elect as it may do so under
certain conditions pursuant to the terms and conditions of the Supply
Agreement, to itself manufacture or otherwise provide for the
manufacture of the Device, a further license shall be deemed issued in
respect of the manufacture of the Device (the "Manufacturing License").
The Manufacturing License shall constitute the right to manufacture or
have manufactured the Device, in accordance with the specifications
therefor and such other modifications as the parties may have agreed
upon, on a worldwide and exclusive basis. The Manufacturing License
will issue, and be deemed in place and effective, upon the
determination by Roche Diagnostics to manufacture the Device, upon and
<PAGE> 4
after the termination of the Supply Agreement by notice by Roche
Diagnostics in accordance with its terms and the payment to SpectRx of
all sums payable thereunder. The term of the Manufacturing License,
unless sooner terminated pursuant to the terms and conditions hereof,
shall be coincident with the term of the Marketing License.
3.4 Neither the Marketing License nor the Manufacturing License, nor any
rights thereunder, may be assigned or sublicensed by Roche Diagnostics
to any person (other than an Affiliate of Roche Diagnostics) without
the express prior written consent of SpectRx, which may not be
unreasonably withheld.
3.5 No royalty will be due or payable in respect of the Marketing License.
During the term of the Manufacturing License, Roche Diagnostics shall
pay to SpectRx, on a quarterly basis, on or before the sixtieth (60th)
day following the end of each calendar quarter, royalties equal to
[ * ] of the total consideration paid or payable to Roche Diagnostics
upon the sale of all Devices (or other value received therefor in
respect of the use of the Device), provided such sale is made on an
arms-length basis to a purchaser unaffiliated to Roche Diagnostics. In
addition, during the term of the Manufacturing License Roche
Diagnostics agrees to pay to GTRC any royalties attributable to the
manufacture and sale of the Device under the GTRC License. If a Device
is sold or given to a purchaser on a non-arms-length basis, including
without limitation a fee per test or other similar arrangement, or if
the Device is provided to a purchaser as an accommodation, the
royalties shall be equal to [ * ] of the fair salable value of such
Devices. If the parties hereto cannot agree as to the fair salable
value of any Devices so sold, the issue shall be settled by dispute
resolution pursuant to Section 10.6 hereof. A Device shall be
considered sold for purposes of this Agreement when it is billed out
to a third party, or when not billed out, when it is delivered,
otherwise conveyed or paid for, whichever occurs first. It is intended
that the foregoing royalty shall be paid in respect of and computed on
the basis of the sales price to parties who are not Affiliates of
Roche Diagnostics, and that inter-company transfers shall not be
considered as sales. Contemporaneously with each royalty payment,
Roche Diagnostics shall furnish to SpectRx a complete statement
certified to be accurate by Roche Diagnostics, showing the number,
country in which manufactured, country in which sold to or to which
shipped and description and sales price in respect of each Device sold
during the preceding calendar quarter. Such a statement shall be
furnished to SpectRx whether or not any Devices have been sold during
the calendar quarter to which such statement refers. The books and
records of Roche Diagnostics relating to such royalty payments shall
be open during business hours for reasonable inspection by a certified
public accountant appointed by SpectRx and reasonably acceptable to
Roche Diagnostics to determine the accuracy of such royalty statements
and payments, but for no other purpose. If such audit reveals that the
royalties reported by Roche Diagnostics are understated by ten percent
(10%) or greater, Roche Diagnostics shall pay for the full cost of the
audit; otherwise, SpectRx shall pay for the audit. In any event, any
underpayment of royalties revealed by such audit shall be promptly
corrected by Roche
(*) Confidential treatment requested pursuant to a request for
confidential treatment filed with the Securities and Exchange
Commission. Omitted portions have been filed separately with the
Commission.
<PAGE> 5
Diagnostics, and any overpayment shall be creditable against future
royalties. Roche Diagnostics shall keep, maintain and preserve, during
the term of the Manufacturing License and for at least two (2) years
following the termination or expiration of such license, complete and
accurate records of account in respect thereof, including, without
limitation, invoices, correspondence and other records. Roche
Diagnostics shall require its Affiliates and other sublicensees to
maintain similar records necessary for the accurate computation and
payment of the royalties payable hereunder.
3.6 Should the Marketing License be terminated pursuant to Section 9.4
hereof prior to the Product Launch and SpectRx undertakes to sell the
Device, then SpectRx shall pay, on a quarterly basis, on or before the
sixtieth (60th) day following the end of each calendar quarter,
royalties equal [ * ] per Device sold in such quarter, although in no
event shall the aggregate sum of all royalties payable to Roche
Diagnostics under this Section 3.6 exceed an amount equal to [ * ] plus
all amounts actually paid SpectRx pursuant to Section 4.3 hereof. The
procedures set forth in Section 3.5 governing the determination of
royalties; statements, records and notices in respect thereof; and
auditing and underpayment or overpayment thereof shall likewise govern
the royalties payable pursuant to this Section 3.6 and pursuant to
Section 3.7.
3.7 Should the Marketing License be terminated pursuant to Section 9.4
hereof within four years after Product Launch, and SpectRx undertakes
to sell the Device, then SpectRx shall pay, on a quarterly basis, on or
before the sixtieth (60th) day following the end of each calendar
quarter, royalties which for the first quarter year succeeding such
termination shall be [ * ] per Device sold in such quarter, with such
rate descending in equal quarterly increments so that such quarterly
royalties in respect of the fourth quarter of the year succeeding such
termination, and for each quarter year thereafter, is [ * ] per Device
sold in such quarter, although in no event shall the aggregate sum of
all royalties payable to Roche Diagnostics under this Section 3.7
exceed [ * ], subject to adjustment if in connection with and prior to
Product Launch Roche Diagnostics expends less than an aggregate of
[ * ] in startup marketing costs for the Device. In such case, each per
Device dollar royalty amount provided for in this Section 3.7 shall be
reduced by multiplying each of such amounts by a quotient, the
numerator being the actual such startup marketing costs incurred by
Roche Diagnostics, and the denominator being [ * ], and the aggregate
dollar limitation will be reduced to an amount equal to [ * ] less the
excess of [ * ] over the actual such startup marketing costs incurred
by Roche Diagnostics.
3.8 Should the Marketing License be terminated pursuant to Section 9.4
hereof, SpectRx agrees to not enter into any marketing alliance or
distribution agreement as to the Device with any companies (or
Affiliates thereof) in the glucose monitoring business. Further, should
the Marketing License be terminated pursuant to Section 9.4 hereof
subsequent to Product Launch, SpectRx agrees to use commercially
reasonable efforts to perform, on behalf of Roche Diagnostics, for a
period of six (6) months any distribution agreements to which Roche
Diagnostics is a party in respect of the Device in existence at the
time of such termination.
(*) Confidential treatment requested pursuant to a request for
confidential treatment filed with the Securities and Exchange
Commission. Omitted portions have been filed separately with the
Commission.
<PAGE> 6
3.9 Coincident with the execution and delivery of this Agreement, SpectRx
will transfer by assignment to Roche Diagnostics royalty free,
world-wide exclusive license, irrevocable, with right of sublicense, to
U.S. Patent Application for the Method and Apparatus for Determining
Duration of Medical Condition (Reference No.SPRX017).
4.0 DEVELOPMENT PAYMENTS
4.1 As consideration for the Marketing License and the option to obtain the
Manufacturing License, and for the world-wide exclusive license to the
patent application as provided in Section 3.9 hereof Roche Diagnostics
will simultaneously with and upon the same day as the execution and
delivery of this Agreement pay to SpectRx, by wire transfer of
immediately available funds to a bank account designated by SpectRx,
[ * ]. (This payment is separate from certain simultaneous payments to
be made to SpectRx pursuant to the Supply Agreement.)
4.2 The Specifications for the Device are set forth on Exhibit C attached
hereto. SpectRx agrees to use commercially reasonable efforts, at its
own cost with milestone payments from Roche to complete development of
the Device according to the Specifications. The Specifications may be
modified upon mutual agreement of the parties, with any additional
development costs related to modifications proposed by Roche
Diagnostics to be paid by Roche Diagnostics with the exception of
changes reasonably required for safety reasons.
4.3 As additional consideration for the licenses referred to in Section
4.1, Roche Diagnostics agrees to pay SpectRx, within thirty (30) days
of receipt of an invoice therefor the following milestones payments
upon the completion of such indicated milestones:
<TABLE>
<S> <C>
Initiate Validation Clinicals [ * ] $ [ * ]
Agency Testing Approval [ * ] $ [ * ]
Initiate Reliability/Lifetime Test (3 Devices[ * ] $ [ * ]
Deliver 4 devices to Roche for clinical testing) [ * ] $ [ * ]
Pilot Production Complete
(30 Devices Shipped to Roche Diagnostics) [ * ] $ [ * ]
</TABLE>
The dates indicated for each milestone are estimated target completion
dates. For each full thirty (30)-day period as to which the completion
is delayed beyond any target completion date, the corresponding
milestone payment will be reduced by [ * ], unless Roche Diagnostics
agrees to extend such deadline, although in no event will any milestone
payment be reduced more than [ * ]in the aggregate. The deadlines
provided for herein above will be deemed extended to accommodate delays
caused by Roche Diagnostics, including without limitation delays due to
changes in the design, the development process, the manufacturing
process, packaging, or additional testing requested by Roche
Diagnostics.
(*) Confidential treatment requested pursuant to a request for
confidential treatment filed with the Securities and Exchange
Commission. Omitted portions have been filed separately with the
Commission.
<PAGE> 7
4.4 Roche Diagnostics shall give technical, clinical and marketing input to
the SpectRx project team during completion of the development tasks
outlined in Section 4.3. Roche Diagnostics will pay the cost of
obtaining clearance from the Food and Drug Administration and its
foreign counterparts necessary for Roche Diagnostics to sell the
Device.
4.5 SpectRx shall at its own expense, with Roche Diagnostics' assistance,
continue to pay maintenance fees and prosecute applications in respect
of the Screening Patents in the following countries: Belgium,
Switzerland, Germany, Spain, Great Britain, Italy, Australia, Canada ,
France, Netherlands, Mexico, and Japan, as reasonably practical as
determined by SpectRx, and maintain any such patents when issued. Roche
Diagnostics shall, at the expense of Roche Diagnostics, with SpectRx's
assistance, prosecute the Duration Patent Application in the name of
SpectRx as owner and in respect of such Application and the patent to
be issued thereunder, file applications for the same patent in the name
of SpectRx as owner in all major markets of the world for the Device
and shall diligently prosecute, at the expense of Roche Diagnostics,
such patent applications and maintain any such patents when issued.
Roche Diagnostics may, at its own expense, file, prosecute and maintain
additional applications for patents anywhere in the world with respect
to applications in the Field, which applications and patents issued
thereunder shall be in the name of and owned by SpectRx, which patent
applications and patents shall become part of the "Know-How."
5.0 CONFIDENTIALITY
5.1 It is contemplated that the parties may wish to transmit to each other
confidential information. Each party agrees to receive such
confidential information, if it is in writing or other tangible form
and clearly marked by the transmitting party prior to transmittal as
being confidential and agrees not to disclose such confidential
information to any third party for a period of five (5) years following
any termination of this Agreement unless the information (a) was known
to the receiving party prior to the time of disclosure, (b) is obtained
from a third party having an apparent right to disclose the
information, (c) was or becomes available to the public through no
fault of the receiving party or (d) was independently developed by
employees of the receiving party who have not had access to the
confidential information. Each party agrees not to use the confidential
information of the other for any purpose other than those set forth in
this Agreement. In the event a party considers certain information
which has been marked confidential to be excluded from the above
obligations of confidence and non-use and intends to make disclosure of
such information to a third party, thirty days written notice of such
intent and the reasons therefor shall be given to the other party. It
is also understood that confidential information may be transmitted
orally between the parties if it is identified at the time of
transmittal as being confidential and within thirty days thereafter
confirmed in writing or other tangible form by the disclosing party and
marked as being confidential. . Each party is entitled to rely on the
non-confidential, non-trade secret status of all information otherwise
transmitted. The covenants in this Section 5.1 also cover Confidential
Information transmitted at any time prior to
<PAGE> 8
the date of this Agreement, including without limitation Confidential
Information transmitted pursuant to, and prior to, the 1994 Development
Agreement.
5.2 It is understood that disclosure of any information by one party to the
other under this Agreement shall in no way be considered as a grant of
any right or license to the receiving party to use such information
except for the purposes set forth in this Agreement. The provisions of
this Section 5.0 shall survive any termination of this Agreement for
any reason.
6.0 JOINT OBLIGATIONS
6.1 Roche Diagnostics and SpectRx each agree to cooperate with the other in
the completion of the development of the Device, including the specific
tasks outlined in Section 4.3 hereof.
6.2 The parties agree to make reasonable efforts to keep each other
informed promptly of:
(a) all improvements relevant to the Device, if any;
(b) all technical information relating to the Know-How as
such data and information are acquired or developed
by either party, if any;
(c) all data or information concerning the clinical
evaluations or studies made by or for
either party relating to the Device for diabetes; and
(d) all publications coming to the attention of either
party relating to the Device, if any for diabetes.
7.0 RELATIONSHIP OF THE PARTIES
This Agreement is not intended to create nor shall it be deemed to
constitute, a partnership, agency, employer-employee, or joint venture
relationship between the parties. The respective activities by the
parties hereunder shall be provided as independent contractors. Neither
party shall incur any debts or make any commitments for the other,
except to the extent, if at all, specifically provided herein.
8.0 GOVERNMENT REGULATIONS AND GUIDELINES
Each party shall use its best efforts to assure that all further work
conducted hereunder shall be in accordance with the laws, rules and
guidelines applicable to the parties carrying out such work, in
particular, so far as applicable, the present and future guidelines for
Good Laboratory Practices and Good Manufacturing Practices set forth,
as amended from time to time, in the Code of Federal Regulations of the
United States of America and the corresponding local law of such other
countries as may be applicable to such work.
9.0 TERM AND TERMINATION
9.1 This Agreement shall remain in effect until terminated in accordance
with sections 9.2 or 9.3,
9.2 This Agreement may be terminated at any time by Roche Diagnostics upon
written notice thereof to SpectRx provided, however, that in the event
of termination pursuant to this section, Roche Diagnostics shall have
no further rights to the Device or the Know-How, the Marketing License
shall terminate and the Manufacturing License (if then granted) shall
terminate, and all sums paid or payable shall remain the property of
SpectRx and shall not be refundable, and to the extent accrued but
unpaid any such sums owed to SpectRx shall thereupon
<PAGE> 9
be immediately due and payable. Roche Diagnostics further agrees that,
if it terminates this agreement under this Section 9.2, for a two year
period, following the effective date of termination, it will not market
an instrument that competes with the Device in the Field. Either party
may terminate this Agreement (and the Manufacturing License if then in
effect) (i) by written notice in the event the other party materially
breaches this Agreement and does not cure such breach within thirty
(30) days of written demand for cure, or (ii) by written notice upon
the liquidation or bankruptcy of, or an assignment for the benefit of
creditors of, or a declaration of insolvency by, the other party.
9.3 If, at any time Roche Diagnostics ceases, or fails to commence, active
marketing efforts in respect of the Device, SpectRx may provide Roche
Diagnostics with written notice of its intent to terminate the
Marketing License and this Agreement. Such termination shall become
effective thirty (30) days after Roche Diagnostics' receipt of such
notice; provided, however, that if Roche Diagnostics gives SpectRx
written notice that it disagrees with SpectRx's conclusion that Roche
Diagnostics is not engaged in active marketing efforts in respect of
the Device, then the Marketing License and this Agreement shall
continue in effect until the parties have resolved their dispute
pursuant to Section 10.6 hereof.
9.4 Upon termination of this Agreement pursuant to this Article 9, the
Marketing License and the Manufacturing License (if granted) shall
terminate and all rights in and to the Device and Know-How shall be
solely and exclusively held by SpectRx. Roche Diagnostics will
thereupon use its reasonable best efforts to cause to be transferred to
SpectRx any governmental approvals obtained or applications submitted
by Roche Diagnostics and necessary for SpectRx to market the Device.
10. MISCELLANEOUS PROVISIONS
10.1 This Agreement constitutes and contains the entire Agreement of the
parties and supersedes any and all prior negotiations, correspondence,
understandings and agreements between the parties respecting the
subject matter hereof. This Agreement may be amended or modified or one
or more of the provisions thereof waived only by written instrument
signed on behalf of the parties.
10.2 Any notice required to be given hereunder shall be sent by first class
registered or certified mail addressed to the party to whom it is to be
given as follows:
To Roche Diagnostics: Roche Diagnostics Corporation
Attn.: President
9115 Hague Road
Indianapolis, Indiana 46250
with copy to Legal Department at
same address
To SpectRx: SpectRx, Inc.
Attn.: President
6025A Unity Drive
Norcross, Georgia 30071
<PAGE> 10
All notices shall be deemed given when sent by registered or certified
mail, postage prepaid, to the addresses listed above. The date of
postmark shall be the date of such notice.
10.3 SpectRx warrants and represents that, as of the date of this Agreement,
it has the right to grant to Roche Diagnostics the rights granted
herein and that there are no outstanding agreements, assignments or
encumbrances inconsistent with this Agreement. SpectRx further
represents and warrants to Roche Diagnostics that it has given Roche
Diagnostics access to substantially all technical and clinical data
thus far generated with respect to the Device and that all such data is
accurate and complete in all material respects to the best of SpectRx's
knowledge. Roche Diagnostics warrants and represents that it has no
outstanding agreements that are inconsistent with this Agreement.
10.4 This Agreement shall be construed according to the laws of the State of
Georgia. Venue for any litigation under this Agreement shall be state
court, Gwinnett County, Georgia.
10.5 During the term of this Agreement or any extension thereof none of the
parties hereto will make any publications relating to the details of
the business arrangement between them contemplated hereunder, including
business plans, without the approval of the other; provided, however,
that such approval shall not be unreasonably withheld. Notwithstanding
the foregoing or anything else provided in this Agreement, neither this
Section 10.5, nor the provisions of Section 10.9, shall restrict (nor
provide a penalty payment as to) publicity or disclosure of this
Agreement or information concerning this Agreement which a party hereto
reasonably determines is required to fulfill its disclosure obligations
to its shareholders under applicable securities laws or as otherwise
customarily provided by such party to its shareholders; provided,
however, that prior to making any such disclosures the party seeking to
make such disclosures shall use reasonable efforts to obtain approval
of the other party of the contents of such disclosures.
10.6 Dispute Resolution. Any dispute arising out of or relating to this
Agreement shall be resolved as provided in, and pursuant to the terms
and conditions of Sections 11.6(a) and 11.6(b) of the Supply Agreement,
which provisions are incorporated herein by this reference.
10.7 All payments made pursuant to this Agreement shall be net of
withholding and other taxes (except for taxes that are due on the net
income of a party) that may be due on such payments.
10.8 This Agreement shall not be assignable by either party without the
prior written consent of the other, such consent will not be
unreasonably withheld; provided, however, that Roche Diagnostics may
assign this Agreement to any Affiliate.
10.9 Prior to Product Launch the parties shall meet and negotiate in good
faith a communications policy to be effective conincent with Product
Launch. Prior to Product Launch, nNo news release, advertisement,
marketing announcement, public announcement, denial or confirmation of
same, of any kind regarding any part of the subject matter of this
agreement or device shall be made by SpectRx without prior written
approval of Roche Diagnostics. Such material shall be presented to
Roche Diagnostics two weeks prior to deadlines for review and
<PAGE> 11
written approval. Failure to comply with the foregoing requirement
will result in a [ * ] payment by SpectRx to Roche Diagnostics per
documented occurrence.
10.10 The acceptable performance of the device per Section 8.3.1 of the
System Specification Document ("SSD") is based on meeting the stated
performance on the defined test population. In no event would SpectRx
be required to invest in R & D or engineering to meet
acceptable/approvable performance other than as defined in the SSD.
WITNESS WHEREOF, the parties hereto, intending to be legally bound,
have duly executed this Agreement as of the date first above written.
SPECTRX, INC.
By:
-------------------------------------
Title:
----------------------------------
ROCHE DIAGNOSTICS CORPORATION
By:
-------------------------------------
Title:
----------------------------------
(*) Confidential treatment requested pursuant to a request for
confidential treatment filed with the Securities and Exchange
Commission. Omitted portions have been filed separately with the
Commission.
<PAGE> 12
Exhibit A
GTRC License
[on File as Exhibit 10.11(A) to Form 10K]
<PAGE> 13
Exhibit B
Volume Requirements Per Section 3.4
(1) Volume requirements will be deemed not met for the two (2)-year period
commencing on the day immediately succeeding the date of Product Launch
if an annual average of less than [ * ] Devices are purchased by Roche
Diagnostics within the two (2) years comprising such period (or should
the Manufacturing License issue, royalties thereunder are paid (or
accrued) in respect of an annual average of less than [ * ] Devices
during such two (2) year period).
(2) Volume requirements will be deemed not met if for any year commencing
on the second (2nd) anniversary, or any subsequent anniversary, of the
date immediately succeeding the date of Product Launch, less than [ * ]
Devices are purchased by Roche Diagnostics during such year (or should
the Manufacturing License issue, royalties thereunder are paid (or
accrued) in respect of less than [ * ] Devices during any such year.
(3) Provided the Marketing License (and Manufacturing License if then in
effect) are maintained as exclusive licenses during the five (5)-year
period commencing on the day immediately succeeding the date of Product
Launch, such licenses shall remain exclusive indefinitely thereafter
(unless terminated in accordance with Section 9 or Roche distributes an
instrument that competes with the Device in the Field as otherwise
provided in Section 3.2 if during such five (5)-year period more than
[ * ] Devices are purchased by Roche Diagnostics (or while the
Manufacturing License is in effect, a royalty is paid (or accrued) in
respect thereof during such period).
(4) For year 2000, Roche Diagnostics [ * ] resulting from reduced purchase
volumes in accordance to the following formula:
[ * ] less the number of units actually purchased by Roche in the year
2000, that difference then multiplied by [ * ]
Any payment shall be requested in writing and will be paid upon
review of the supporting details. Payment will be made within 30 days
of the end of the year in question.
(*) Confidential treatment requested pursuant to a request for
confidential treatment filed with the Securities and Exchange
Commission. Omitted portions have been filed separately with the
Commission.
<PAGE> 14
Exhibit C
Specifications for Device
[*]
(*) CONFIDENTIAL TREATMENT REQUESTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED
PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION.
<PAGE> 1
AMENDED AND RESTATED SUPPLY AGREEMENT
THIS AGREEMENT is entered into and made effective as of the 13th day of
July, 1999, by and between ROCHE DIAGNOSTICS CORPORATION, an Indiana
corporation, having a principal place of business at 9115 Hague Road,
Indianapolis, Indiana 46250, ("Roche Diagnostics"), and SPECTRX, INC., a
Delaware corporation, 6025A Unity Drive, Norcross Georgia, 30071 ("SpectRx").
WITNESSETH:
WHEREAS, SpectRx and Boehringer Mannheim Corporation, n/k/a Roche
Diagnostics Corporation, entered into a Supply Agreement dated January 5, 1996
(the "1996 Supply Agreement") to provide for certain agreements related to the
purchase and sale of a non-invasive diabetes screening instrument then under
development by SpectRx for Roche Diagnostics pursuant to a Development and
License Agreement between such parties dated December 2, 1994 (the "1994
Development Agreement");
WHEREAS, the parties wish to amend and restate the 1996 Supply
Agreement in respect of the non-invasive diabetes screening instrument developed
to date, which amended and restated agreement will supersede the 1996 Supply
Agreement;
WHEREAS, contemporaneously herewith, the parties have amended and
restated the 1994 Development Agreement (such amended and restated agreement
being referred to as "Development Agreement";
NOW THEREFORE, in consideration of these premises and of the mutual
covenants contained herein, the parties agree as follows:
1.0 DEFINITIONS
1.1 "Affiliates(s)" shall mean, with respect to either party, any
corporation, partnership or other business entity that now or in the
future controls, is controlled by, or is under common control with,
such party. "Control" shall mean the direct or indirect ownership of
fifty percent (50%) or more of the voting interest in, or a fifty-
percent (50%) or more interest in the income of, such corporation or
other business entity. Not withstanding the foregoing, Genentech, Inc.,
shall not be deemed an Affiliate of Roche Diagnostics.
1.2 "Manufacturing Documentation" shall mean specifications, drawings and
manufacturing instructions which enable SpectRx or a third party to
manufacture the Instrument including, but not limited to, software, all
software source codes in printout or magnetic media form, software
assembly, linkage and validation protocols and software validation
results, manufacturing specifications for the Instrument, (service and
training information and a set of quality control parameters suitable
for use in acceptance testing of the Instrument), as well as all
preliminary or working drafts of all such materials, and documentation
developed by SpectRx in order to produce such materials.
Page 1
<PAGE> 2
1.3 "Instrument" shall mean the instrument as described in the
Specification.
1.4 "Specification" shall mean the "System Specification Document, Magnum
Diabetes Screening Instrument, Project 227" attached hereto and
incorporated by reference as Exhibit A.
2.0 SUPPLY SERVICES
2.1 During the term of this Agreement, SpectRx shall manufacture and sell
the Instrument to Roche Diagnostics and Affiliates for worldwide
marketing and selling at prices established by the parties pursuant to
Section 3.1. SpectRx shall sell the Instrument exclusively to Roche
Diagnostics for so long as the Marketing License provided for in the
Development Agreement remains exclusive. Nothing in this Agreement
shall prevent Roche Diagnostics during the term of this Agreement from
manufacturing or having manufactured, marketing, selling, or otherwise
supplying other non-invasive devices on a worldwide basis.
2.2 During the term of this Agreement, SpectRx covenants and agrees (a) to
provide an adequate and timely supply of the Instrument to Roche
Diagnostics in accordance with purchase orders issued by Roche
Diagnostics, subject to the terms and conditions contained in this
Agreement, (b) to follow the most current and pertinent Federal Food
and Drug Administration guidelines to the extent applicable, and be in
compliance in all material respects with Quality System Regulations as
found in 21 CFR ss. 820, and (c) to employ reasonably sound cost
management practices. SpectRx further agrees to make available to Roche
for purchase, spare parts and or replacement / repair parts for a
period of not less than seven [7] years from end of market sales by
Roche. Notwithstanding the foregoing, SpectRx shall have no obligation
to make available spare and or replacement parts if the Manufacturing
License has been issued to Roche Diagnostics and for as long as it
remains in effect.
2.3 In order to facilitate SpectRx planning of production, and to assist
SpectRx in making certain decisions relative to inventory of long lead
items, Roche shall submit to SpectRx a non-binding estimate of its
requirements of Instruments monthly covering a forward period of not
less than twelve 12 months, beginning six months after the signing of
this agreement. Upon receipt of Roche's estimate, if SpectRx determines
that it has insufficient capacity to meet the quantities stated in the
estimate, it shall notify Roche within fifteen (15) days of the date of
receipt of Roche's estimate that such condition exists, and present
recommendations regarding capacity changes to meet Roche's estimate. In
the event this Agreement is terminated (other than a termination by
Roche Diagnostics pursuant to Section 9.2), Roche shall be responsible
for reasonable quantities of components purchased, or reasonably
committed to be purchased by SpectRx, at lead-time in accordance with
the non-binding estimate. In the event of such termination SpectRx
shall use commercially reasonable efforts to
Page 2
<PAGE> 3
return the components while minimizing any cost associated with the
activity. Roche Diagnostics will buy from SpectRx any components which
are unable to be returned pursuant to the preceding sentence, and pay
any restocking charges that have been approved in writing by Roche
Diagnostics, such approval shall not be unreasonably withheld.
2.4 The first purchase order issued under this Agreement will cover the
first three (3) months of supply. Subsequently, Roche shall issue
purchase orders, containing specific instructions concerning quantity,
delivery schedule, invoicing, etc., from time to time for the supply of
Instruments based on a manufacturing lead-time [purchase order receipt
to delivery of Instruments] of ninety (90) calendar days.
2.5 SpectRx warrants to Roche that it has or will have a minimum installed
equipment manufacturing capacity to produce one hundred and twenty-five
(125) Instruments per month (based on a single shift) at Product Launch
(as defined in the Development Agreement). SpectRx will maintain
installed equipment manufacturing capacity (based on the number of
shifts that are currently staffed) of at least thirty percent (30%)
above the six (6) month average (adjusted monthly) order rate, which
shall be calculated by adding the forward six (6) months of purchase
order and estimated requirements and dividing the sum by six (6).
2.6 SpectRx shall not make any change to the Instrument or the manufacture
thereof that may affect the form, fit, function, reliability, or
appearance of the Instrument without the prior written consent of Roche
which shall not be unreasonably withheld.
2.7 Delivery of Instruments shall be made F.O.B. SpectRx's Norcross,
Georgia facility.
2.8 The Instruments shall be supplied and labeled in accordance with Roche
Diagnostics-approved packaging specifications. Roche Diagnostics shall
prepare the artwork necessary for printing the labels and instruction
manual and shall deliver such artwork to SpectRx at mutually agreed
upon time intervals prior to the scheduled delivery from SpectRx of the
first shipment of Instruments ordered by Roche Diagnostics. Roche
Diagnostics agrees to reasonably recognize SpectRx's efforts with
respect to producing the Instrument by placing on the Instrument
verbiage such as: Co-developed and manufactured by SpectRx Inc. for
Roche Diagnostics as shown in Exhibit G.
3.0 PRICE
3.1 The purchase price to Roche Diagnostics for the Instruments shall be
established based on the pricing formula and pricing caps set forth in
Exhibit B.
Page 3
<PAGE> 4
3.2 SpectRx, as long as it is the manufacturer of the Instrument, and then
successor manufacturers, whether they be Roche Diagnostics or other
parties arranged for by Roche Diagnostics pursuant to the Manufacturing
License provided for in the Development Agreement, will pay to GTRC
("Georgia Tech Research Corporation") the royalty fee provided for in
the GTRC License (as those terms are defined in the Development
Agreement).
3.3 Terms of payment shall be net thirty (30) days, except that during the
first year after Product Launch (as defined in the Development
Agreement) Roche Diagnostics shall forward payment within ten (10) days
of receipt of Instruments and corresponding invoice.
4.0 CERTAIN PAYMENTS RE: PARTS AND TOOLING
4.1 To assist SpectRx in its initial purchase of long-lead time component
parts for the Instruments, Roche Diagnostics, coincident with, and upon
the same day as, the execution and delivery of this Agreement, shall
pay to SpectRx, by wire transfer of immediately available funds to a
bank account designated by SpectRx, the sums indicated on Exhibit C
attached hereto, and SpectRx will employ such sums to purchase the
component parts for the Instruments listed on such exhibit. Roche
Diagnostics will be repaid for this advance on the first (1st)
anniversary of the date of Product Launch (as that term is defined in
the Development Agreement).
4.2 Roche Diagnostics will, coincident with, and upon the same day as, the
execution and delivery of this Agreement, pay to SpectRx, by wire
transfer of immediately available funds to a bank account designated by
SpectRx[ * ]to compensate SpectRx in part for the purchase of certain
tooling identified on Exhibit D attached hereto, which property shall
be deemed jointly owned by Roche Diagnostics and SpectRx (with Roche
Diagnostics owning an undivided interest therein equal to a quotient,
the numerator equaling [ * ] and the denominator equaling the total
acquisition costs incurred by SpectRx in purchasing such tooling, and
with SpectRx owning the remaining undivided interest therein), but such
tooling shall remain in the possession of SpectRx unless and until the
Manufacturing License is issued pursuant to Section 10 hereof. All
other tooling and equipment necessary to manufacture the Instruments
will be purchased by and be the property of SpectRx, unless and until
conveyed to Roche Diagnostics pursuant to Section 10 hereof.
5.0 INSPECTION AND QUALITY CONTROL
5.1 Each shipment of Instruments to Roche Diagnostics shall be accompanied
by a certificate of analysis from SpectRx indicating that each
Instrument, identified by its serial number, contained in the shipment
has passed the quality control parameters developed from the
Specification by SpectRx, set forth in SpectRx
Page 4
(*) Confidential treatment requested pursuant to a request for
confidential treatment filed with the Securities and Exchange
Commission. Omitted portions have been filed separately with the
Commission.
<PAGE> 5
document BMC3-00151-QA attached as Exhibit H ("Quality Data"), which
may be amended from time to time through the SpectRx document control
system and approved in writing by Roche Diagnostics. Said Quality Data
shall become part to the Manufacturing Documentation. Roche Diagnostics
reserves the right at such frequency that Roche Diagnostics feels
appropriate and upon providing SpectRx with reasonable notice, to visit
SpectRx's facility, or other third party manufacturer of the
Instrument, for the purpose of confirming that SpectRx's quality system
and process is in conformance to agreed upon parameters.
5.2 SpectRx shall ship Instruments to Roche customers upon written
instructions from Roche. The price for storage and handling of said
Instruments at SpectRx shall be negotiated by the parties prior to
first shipment of units to Roche Diagnostics. SpectRx shall perform one
hundred percent (100%) final inspection to verify performance and
appearance in accordance with the parameters and attributes set forth
in the Quality Data. Upon shipment the certificate of analysis and the
one hundred percent (100%) test data shall be forwarded to Roche
Diagnostics.
5.3 SpectRx shall keep complete reproducible records of all data pertaining
to SpectRx's performance under this Agreement and as it relates to
individual Instruments for the life of the Instrument. Furthermore,
SpectRx shall retain all device master records and device history
records pertaining to the manufacture of the Instrument. This data
shall include traceability of critical components and subassemblies, as
determined by SpectRx and agreed to in writing by Roche Diagnostics.
Roche Diagnostics agrees to implement its current warranty card
tracking system for the Instruments sold by Roche Diagnostics pursuant
to this Agreement.
6.0 WARRANTIES AND INDEMNIFICATION
6.1 SpectRx warrants to Roche Diagnostics that all Instruments to be
supplied hereunder will upon shipment meet the agreed upon
Specification, will be free from defects in materials and workmanship,
and will be properly packed and labeled according to the Specification;
provided, however, in respect of defects in materials and workmanship,
and in respect of packaging and labeling, should a matter be covered by
the Specification, the Specification will control. This warranty shall
apply for a period of twenty-four (24) months after the date of
shipment by SpectRx, or twelve (12) months from date of delivery to the
end user, whichever occurs first. SpectRx shall satisfy this warranty
requirement by repairing or replacing, at no charge to Roche
Diagnostics at such time, each defective Instrument that is returned to
it prior to the expiration of the warranty period. SpectRx shall not be
liable for loss or damages arising out of misuse of the Instrument by
Roche Diagnostics, its agents or customers. Such repair or replacement
will be done in accordance with Instrument Service/Loaner
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<PAGE> 6
Procedure as set forth in Exhibit F attached hereto, which may be
amended from time to time upon written request by SpectRx and approval
by Roche Diagnostics which approval shall not be unreasonably withheld.
6.2 SpectRx warrants that the Instrument annualized field failure rate
based on instruments returned to SpectRx whose performance is found to
be non conforming to the Specifications other than due to misuse or
abuse for Instruments delivered to Roche Diagnostics in a given month
("Failure Rate") will be less than 30% during the first year after
Product Launch (as defined in the Development Agreement) and less than
15% after the end of the second year after Product Launch. SpectRx will
make all commercially reasonable efforts to reduce the Failure Rate, at
SpectRx's expense, to the lowest practical level. SpectRx will conduct
a failure analysis on all field failures as required by the U.S. Food
and Drug Administration ("FDA") regulations, with respect to defective
Instruments that are returned under Section 6.1 hereof by end users.
Root causes of such defects will be determined where possible, and
commercially reasonable corrective actions will be taken on the
Instrument design and/or manufacturing process as appropriate. SpectRx
will track failure rates and failure modes in respect of such
Instruments, and provide at least quarterly reports of such findings,
trends and corrective action programs as to same to Roche Diagnostics.
Provided SpectRx uses such efforts and otherwise complies with the
covenants set forth in this Section 6.2, the breach of the warranty set
forth in the first sentence of this section 6.2 will not constitute a
breach for purposes of Section 9.2 hereof or otherwise. For any monthly
period where the Failure Rate limit is exceeded, the minimum annual
volume requirements as stated in Section (1) of Exhibit B of the
Development and License Agreement will be reduced by the number of
defective Instruments returned from said monthly period in excess of
the Failure Rate limit. Nothing in this Section 6.2 shall affect
SpectRx's obligations under Sections 6.1,6.3,6.4,6.5, or 6.7.
6.3 With respect to any instruments manufactured by SpectRx, SpectRx shall
be liable for and shall indemnify, defend and hold Roche Diagnostics
harmless against any and all claims, suits, proceedings, recoveries,
and damages, including but not limited to costs and expenses of total
or partial Instrument recall, whether initiated voluntarily by Roche
Diagnostics or at the direction of the FDA (collectively "Recall
Claims") arising out of, based on, or caused by defects in material or
workmanship or failure of the Instrument to conform to the
Specification, although in no event will SpectRx's aggregate liability
in respect to all Recall Claims exceed [ * ]. Such recall, if initiated
by Roche Diagnostics, shall be based on the reasonable belief by Roche
Diagnostics that if no such recall action is taken at such time, the
FDA would reasonably be expected to initiate such recall action. In no
event shall (i) SpectRx be liable for or be required to indemnify Roche
Diagnostics for or hold it harmless from any claims arising in whole or
in part from or based on, or caused by defects or deficiencies in any
Page 6
<PAGE> 7
features of the Instrument designed by Roche Diagnostics or its
Affiliates, any component of the Instrument designed by Roche
Diagnostics or the literature supplied by Roche Diagnostics for use
with the Instrument, or claims made by Roche Diagnostics or its agents,
(ii) SpectRx be liable to Roche Diagnostics or any person for any loss
or damage to the extent caused by any misuse of the Instrument or
reliance upon the Instrument in respect of the issuance of any medical
opinion, (iii) SpectRx be liable to Roche Diagnostics or any person for
any implied warranties for merchantability or fitness for a particular
purpose or any express warranties. Roche Diagnostics agrees to
incorporate in its documentation to its customers that its warranty for
product liability will not exceed the repair or replacement of the
Instrument or the return of the price thereof. SpectRx shall promptly
notify Roche Diagnostics of any situation which may affect a decision
to recall the Instrument, however, Roche Diagnostics shall have the
final authority to institute a voluntary recall, which authority shall
not be exercised unreasonably. Notwithstanding the foregoing, in no
event shall either party be liable to the other party or any other
person for any incidental or consequential damages pursuant to this
Section 6.3 or any other provision of this Agreement or otherwise
arising from or in any way connected with the purchase or use of the
Instrument.
6.4 SpectRx shall indemnify, defend and hold Roche Diagnostics harmless
from any and all claims, demands, actions and causes of action against
Roche Diagnostics in connection with any and all injuries, damages or
liabilities of any kind whatsoever directly or indirectly attributed to
manufacture of the Instrument or component deficiencies or defects, or
failure of the Instrument to conform to the Specification, although in
no event shall SpectRx's liability in respect of the foregoing
indemnity as to any single occurrence exceed [ * ], or in the aggregate
for all Instruments, exceed [ * ]. This indemnification obligation
shall include, without limiting the generality of the foregoing
reasonable attorney's fees, and other costs or expenses incurred in
connection with the defense or settlement of any and all such claims,
demands, actions or causes of actions.
6.5 As of the date hereof, SpectRx warrants and represents to Roche
Diagnostics that SpectRx has no actual knowledge of any infringement of
the existing patent or other intellectual property rights of any other
party which would be caused by the manufacturing, offering for sale,
sale or use of the Instruments. SpectRx will indemnify and hold Roche
Diagnostics harmless from and against any claims, actions or demands
(including, without limitation, attorney's fees, interest and
penalties) based upon the alleged infringement by the manufacture,
offering for sale, sale, or use of the Instrument of any patent or
other intellectual property rights now or hereafter existing, provided,
and notwithstanding anything stated herein to the contrary, SpectRx's
liability pursuant to this Section 6.5 shall in no event exceed
[ * ] in aggregate. If any such claim, action or demand based upon
intellectual property infringement is made against Roche Diagnostics,
SpectRx shall promptly initiate commercially reasonable efforts to the
extent necessary:
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(*) Confidential treatment requested pursuant to a request for
confidential treatment filed with the Securities and Exchange
Commission. Omitted portions have been filed separately with the
Commission.
<PAGE> 8
a) secure permission, with Roche Diagnostics consent,
which will not be unreasonably denied, to continue
the manufacture and supply of Instruments to Roche
Diagnostics, with one-half of any royalties payable
for any such Instrument supplied to Roche Diagnostics
added (without adjustment for margin corresponding
thereto) to the price of the Instrument, and also
such amount, on the same dollar-for-dollar basis
shall be added to the Unadjusted Maximum Price as set
forth in Exhibit B attached hereto applicable
thereto, or
b) provide an Instrument which is non-infringing yet
still meets the agreed upon Roche Diagnostics
requirement as contained in this Agreement.
Roche Diagnostics will not file an infringement claim against the
SpectRx licensed device based on existing or in licensed intellectual
property, so long as Roche has the marketing rights.
6.6 Roche Diagnostics will indemnify and hold SpectRx harmless from any and
all claims, demands, actions or causes of action against SpectRx, in
connection with any and all injuries, losses damages or liability of
any kind whatsoever directly or indirectly attributed to features of
the Instrument designed according to Roche Diagnostic's or its
Affiliates' instructions or directions or any omission or misstatement
in the literature supplied by Roche Diagnostics for use with the
Instrument. This indemnification obligation shall include, without
limiting the generality of the foregoing, reasonable attorney's fees
and other costs or expenses incurred in connection with the defense or
settlement of any such claim, demand, actions, or causes of action.
Notwithstanding the foregoing, in no event shall Roche Diagnostics be
liable to SpectRx or any other person for any incidental or
consequential damages arising from or in any way connected with the
purchase or use of product.
6.7 Roche Diagnostics and SpectRx agree in conjunction with their
obligations under this Agreement to avoid knowingly designing and/or
developing any item that infringes any patent of a third party. If
either party becomes aware of an issue relating to patent infringement
during the course of performing hereunder, it will promptly notify the
other party.
6.8 If Roche Diagnostics licenses third party intellectual property in
order to make, use, offer for sale and sell Instruments and any other
things supplied by SpectRx under this Agreement, then the price paid to
SpectRx for such Instruments and other things shall be reduced by one
half of the amount paid to the third party for such license.
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<PAGE> 9
7.0 CONFIDENTIALITY
7.1 All information identified as confidential according to the procedure
set out in paragraph 5.1 of the Development Agreement and received by
one party from the other shall be subject to the obligations of
confidentiality provided for in the amended and restated Development
Agreement.
7.2 Upon any termination or expiration of this Agreement, the parties agree
that the receiving party shall promptly return all confidential
information to the transmitting party, except for one copy thereof that
shall be kept in a limited access file by the receiving party and used
only for monitoring its obligations hereunder. In the event of a loss
of any item containing such confidential information, the party
claiming said loss will promptly notify the other party in writing.
8.0 EMPLOYEES
8.1 Personnel assigned by SpectRx to perform services under this Agreement
will be employees or contractors of SpectRx and will not for any
purpose be considered employees or agents of Roche Diagnostics. SpectRx
assumes full responsibility for the actions of such personnel while
performing services hereunder and shall be solely responsible for their
supervision, daily direction and control, payment of salary (including
withholding of income taxes and social security), workers compensation,
disability benefits and the like.
8.2 Personnel assigned by Roche Diagnostics to perform services under this
Agreement will be employees or contractors of Roche Diagnostics and
will not for any purpose be considered employees or agents of SpectRx.
Roche Diagnostics assumes full responsibility for the actions of such
personnel while performing services under this agreement as well as
promotion, distribution and any sales activities with respect to the
Instrument and Roche Diagnostics shall be solely responsible for their
daily supervision, daily direction and control, payment of salary
(including withholding of income taxes and social security), workers
compensation, disability benefits and the like.
9.0 TERM AND TERMINATION
9.1 Unless terminated pursuant to the terms hereof, the term of this
Agreement shall be coincident with the term of the Development
Agreement. The parties agree that in the event of termination of this
Agreement, all confidential information, documents, materials, tools,
etc. which are the property of either party shall be promptly returned
to such party.
9.2 Either party may terminate this Agreement by written notice to the
other in the event (i) the other party materially breaches this
Agreement and does not cure
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<PAGE> 10
such breach with thirty (30) days of written demand for cure; or (ii)
by written notice upon the liquidation or bankruptcy of, or an
assignment for the benefit of creditors of, or a declaration of
insolvency by, the other party. Termination of this Agreement by
SpectRx pursuant to this Section 9.2 shall constitute a termination of
the Development Agreement and the Marketing License granted thereunder.
In the event of termination by SpectRx pursuant to this Section 9.2,
Roche Diagnostics shall have no further rights to the Device or the
Know-How (as defined in the License Agreement in Sections 1.2 and 1.3,
respectively), the Marketing License shall terminate and the
Manufacturing License (if then granted) shall terminate, and all sums
paid or payable shall remain the property of SpectRx and shall not be
refundable, and to the extent accrued but unpaid any such sums owed to
SpectRx shall thereupon be immediately due and payable. Termination of
this Agreement by Roche Diagnostics pursuant to this Section 9.2 shall
not constitute a termination of the Development Agreement nor the
Marketing License granted thereunder. In the event of termination of
this Agreement by Roche Diagnostics pursuant to this Section, Roche
Diagnostics shall be deemed to have acquired the Manufacturing License
described in the Development Agreement effective upon such termination,
and provisions of Section 10 of this Agreement shall survive such
termination.
10.0 PROVISIONS GOVERNING MANUFACTURING LICENSE
10.1 In the event Roche Diagnostics obtains the Manufacturing License in
accordance with the terms and conditions set forth below or pursuant to
Section 9.2, Roche Diagnostics shall have full, complete and
unrestricted access to the Manufacturing Documentation. SpectRx agrees
to provide all reasonable resources, as provided for in Section 10.2
hereof, to render Roche Diagnostics fully qualified in all respects to
supply Instruments with the same specifications, and manufacturing
criteria and under the same regulatory and quality standards as if
manufactured by SpectRx. Roche Diagnostics will receive from SpectRx a
maximum of five hundred (500) hours of training at no cost and Roche
Diagnostics will supply reasonably competent manufacturing and
technical personnel who will be trained by SpectRx to support
production of the Instrument.
10.2 The Manufacturing License shall issue only after the occurrence of a
"Material Failure" (as defined below) by SpectRx to timely deliver
Instruments purchased pursuant to Purchase Orders. "Material Failure"
constitutes the failure by SpectRx to deliver upon or before the
requested delivery dates therefor as specified in Purchase Orders: a)
at least fifty percent (50%) of the Instruments that meet the
Specification therefor (other than in immaterial respects) requested to
be delivered within the first six (6) months of production, b) or at
least seventy five (75%) of the Instruments that meet the Specification
therefor requested to be delivered within the second six (6) months of
production (the first twelve months of production beginning with the
manufacture of the "period Two Instruments" (as
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<PAGE> 11
defined in Exhibit B to the Agreement) being the "Initial Manufacturing
Period") after the Initial Manufacturing Period and c) at least ninety
(90%) of the instruments that meet the specification therefor requested
to be delivered after the Initial Manufacturing Period. For purposes of
the foregoing, Instruments delivered on or prior to the requested
delivery date therefor which are thereafter replaced or corrected on a
timely basis pursuant to and in accordance with the provisions of
Section 6.1 hereof shall be deemed to have been timely delivered in
accordance with applicable Specification. Notwithstanding the
foregoing, a Material Failure will not be deemed to have occurred by
reason of the failure of SpectRx to deliver Instruments in quantities
in any month during any six (6) month period in excess of the
manufacturing capacity so stated in Section 2.5 hereof. Upon the
occurrence of a Material Failure, should Roche Diagnostics give SpectRx
written notice specifying such failure in reasonable detail, and should
SpectRx not cure such Material Failure, within ninety (90) days of
receipt of such notice, then upon a further written notice from Roche
Diagnostics, and effective as of a date indicated therein, the
Manufacturing License shall take effect and be deemed issued. Upon such
issuance, SpectRx shall cooperate with Roche Diagnostics in a
transition of manufacturing of the Instruments to Roche Diagnostics,
the tooling and equipment then used in the manufacture of the
Instruments shall be conveyed by SpectRx to Roche Diagnostics with
Roche Diagnostics reimbursing SpectRx for its acquisition costs
therefor (giving credit for the sum previously paid SpectRx by Roche
Diagnostics pursuant to Section 4.2 hereof to the extent the tooling
set forth on Exhibit D is transferred to Roche Diagnostics), and
component parts and materials on hand or committed to be purchased by
SpectRx be sold to Roche Diagnostics by SpectRx at SpectRx's cost.
Subsequent to the issuance of the Manufacturing License, but no sooner
than one (1) year from the issuance of the Manufacturing License,
manufacturing of the Instruments may revert to SpectRx upon a
demonstration in reasonable detail by SpectRx of its ability to resume
manufacturing in conformance with the provisions of this Agreement
accommodating Roche Diagnostics' volume requirements as to the
Instruments and meeting the Specification, contingent upon full
reimbursement by SpectRx to Roche Diagnostics of all reasonable costs
and expenses associated with the issuance of the manufacturing license
and subsequent commencement of manufacturing by Roche Diagnostics or a
third party chosen by Roche Diagnostics. Should SpectRx make the
showing necessary to cause the manufacturing to revert to SpectRx,
Roche Diagnostics shall cooperate with SpectRx in the transition of
manufacturing of the Instruments to SpectRx, the tooling and equipment
then used in the manufacture of the Instruments shall be conveyed by
Roche Diagnostics to SpectRx with SpectRx reimbursing Roche Diagnostics
for its acquisition costs therefor (not including the sum paid SpectRx
by Roche Diagnostics pursuant to Section 4.2 hereof to the extent the
tooling set forth in Exhibit D is transferred to SpectRx, with
ownership of such tooling to be maintained as set forth in Section 4.2
hereof), component parts and materials on hand sold to SpectRx by Roche
Diagnostics at its cost, and the provisions of this Agreement providing
for the
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<PAGE> 12
purchase and supply of Instruments shall be deemed re-instituted and
shall govern the parties accordingly. A "Material Failure" shall not
include the inability of SpectRx to supply Instruments, which is the
result of component supply interruptions which are caused without
negligence on the part of SpectRx.
11.0 GENERAL PROVISIONS
11.1 The rights and obligations of Articles 6 (WARRANTIES), and 11 (GENERAL
PROVISIONS) shall survive any termination of this Agreement and shall
bind the parties and their legal representatives, successors and
assigns. Neither party may assign this Agreement (except to an
Affiliate) without the consent of the other, which consent shall not be
unreasonably withheld.
11.2 SpectRx and Roche Diagnostics shall do all things necessary to comply
with all applicable Federal, State and local laws, regulations and
ordinances, including but not limited to the Regulations of the United
States Department of Commerce relating to the export of Technical Data,
insofar as they relate to the services to be performed under this
Agreement. SpectRx shall obtain any required government documents and
approvals in the event of SpectRx export of Instruments manufactured
for Roche Diagnostics Affiliates hereunder and for any technical data
disclosed to SpectRx by Roche Diagnostics. SpectRx will not be the
exporter of record for exports to Roche Diagnostic's customers. SpectRx
will provide documentation that its facility and manufacturing process
complies with FDA published guidelines and upon request by Roche
Diagnostics demonstrate compliance.
11.3 Each of the parties hereto shall be excused from the performance of its
obligations hereunder in the event such performance is prevented by
force majeure and such excuse shall continue as long as the condition
constituting such force majeure continues, plus fifteen (15) days after
the termination of such condition. For purposes of this Agreement,
force majeure is defined as follows: Causes beyond the control of
SpectRx or Roche Diagnostics including, without limitation,
regulations, laws or acts of any government, delays by exporting
agency, destruction of production facilities or material by fire, or
failure of public utilities or common carriers or embargo.
11.4 This Agreement, its appendices and the Development embody the entire
understanding and agreement among the parties and supersede all
previous negotiations, representations, writings and agreements,
written or oral, with respect to the development and sale of the
Instrument. This Agreement shall in no way preclude SpectRx or Roche
Diagnostics (or any of their Affiliates) from entering into any
agreements in the future which are not specifically limited or
precluded hereunder.
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<PAGE> 13
11.5 All notices, demands and communications provided for in this Agreement
shall be in writing and shall be deemed effective by a party upon hand
delivery or when mailed, postage prepaid, by registered or certified
mail, to the other party or its copy designee at the respective
addresses listed below, unless and until such address is changed by
giving written notice thereof in like manner.
To Roche Diagnostics: Roche Diagnostics Corporation
9115 Hague Road
Indianapolis, IN 46250
Attn: Purchasing Manager
With copy to Legal Department
at same address
To SpectRx: SpectRx, Inc.
6025A Unity Drive
Norcross, Georgia 30071
Attn: President
11.6 Dispute Resolution
11.6.1 The parties shall attempt in good faith to resolve any dispute arising
out of or relating to this agreement promptly by negotiations between
representatives who have authority to settle the controversy. Either
party may give the other party written notice of any dispute not
resolved in the normal course of business. Within thirty days after
delivery of such notice, representatives of both parties shall meet at
a mutually acceptable time and place, and thereafter as often as they
reasonably deem necessary, to exchange relevant information and to
attempt to resolve the dispute. If the matter has not been resolved
within sixty days of the disputing party's notice, or if the parties
fail to meet within thirty days, either party may initiate mediation
of the controversy or claim as provided in subparagraph (b) of this
Section, unless the matter is governed by subparagraph (c) of this
Section. All negotiations pursuant to this clause are confidential and
shall be treated as compromise and settlement negotiations for
purposes of the Federal Rules of Evidence and state rules of evidence.
11.6.2 If the dispute has not been resolved by negotiation and unless the
dispute is concerning the matters described in and governed by
subparagraph (c) below, then the parties shall endeavor to settle the
dispute by mediation, non-binding arbitration, or other appropriate
means for a period of at least sixty days before resorting to
litigation. The procedures specified in this Section 10.6 must be
followed before either party may seek judicial relief; provided,
however, that a party may seek a preliminary injunction or other
provisional judicial relief if in its judgment such action is
necessary to avoid irreparable damage or to preserve
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<PAGE> 14
the status quo. Despite such action, the parties will continue to
participate in good faith in the procedures specified in this Section
10.6. All applicable statutes of limitation and defenses based upon
the passage of time shall be tolled while the procedures specified
in this Section 10.6 are pending, and the parties shall take such
action, if any, required to effectuate such tolling.
11.6.3 Any dispute regarding the issuance of the Manufacturing License, and
in particular the occurrence of any of the conditions listed in
Section 10.2 hereof or in any way relating to the construction or
interpretation of the rights or obligations of the parties thereunder
or in respect thereof, which is not resolved through consultation as
provided in subsection (11.6.1) of this Section, shall be resolved by
an arbitration proceeding conducted in accordance with the following:
(i) The arbitration proceeding shall be governed by the
rules of the American Arbitration Association
("AAA"), and shall take place in Atlanta, Georgia;
(ii) The arbitrator shall be qualified by education and
training to pass upon the particular matter to be
decided;
(iii) There shall be one (1) arbitrator who shall be
selected in accordance with the procedures of AAA;
(iv) The parties shall agree in advance as to the manner
in which the arbitrator shall promptly hear witnesses
and arguments, review documents and otherwise conduct
the arbitration proceedings. Both parties shall
receive notice of the subject of the arbitration and
the arbitration shall not be binding on the parties
with respect to any matters not specified in such
notice. Should the parties fail to reach an agreement
as to the conduct of such proceedings, the arbitrator
shall formulate his own procedural rules and promptly
commence the arbitration proceedings;
(v) The arbitration proceedings shall be conducted as
expeditiously as possible with due consideration for
the complexity of the dispute in question. The
arbitrator shall issue its decision in writing (with
findings of fact and conclusions of law) within
twenty (20) days from the hearing of final arguments
by the parties;
(vi) The arbitration award shall be given in writing and
shall be final and binding on the parties with
respect to the subject matter identified in the
notice called for by subsection (c)(iv) of this
Section, and not subject to any appeal and shall deal
with the question of costs of arbitration;
(vii) Judgment upon the award may be entered in any court
having jurisdiction or, application may be made to
such court for a judicial recognition of the award or
an order of enforcement thereof, as the case may be;
(viii) The parties shall not submit a dispute subject to
this subsection (b) of this Section to any federal,
state, local or foreign court or arbitration
association except as may be necessary to enforce the
arbitration procedures of this subsection (b) of this
Section or to enforce the award
Page 14
<PAGE> 15
of the arbitration panel, and if court proceedings to
stay litigation or compel arbitration under the
Federal Arbitration Act (Title 9, U.S.C.) or similar
state or foreign legislation are necessary, the party
who unsuccessfully opposes such proceedings shall pay
all associated costs, expenses and attorneys' fees
which are reasonably and actually incurred by the
other party;
(ix) The parties shall keep confidential the arbitration
proceedings and the terms of any arbitration award,
except as may be otherwise required by law.
11.7 In the case of conflict between the general terms and conditions of a
Roche Diagnostics issued purchase order, or of an SpectRx acceptance of
a Roche Diagnostics purchase order, and this Agreement, the terms and
conditions of this Agreement shall take precedence unless otherwise
agreed in writing by the parties.
11.8 SpectRx shall make its records and facilities involved in the
performance of this Agreement available to Roche Diagnostics personnel
at reasonable and mutually convenient times during normal business
hours for audit purposes and shall take any reasonable actions required
by Roche Diagnostics to facilitate such audit.
11.9 SpectRx shall not utilize the exterior design (including the mechanical
design and the industrial design) of the Instrument for any other
purpose (device, application, etc.) without the prior written consent
of Roche Diagnostics. Roche Diagnostics acknowledges that SpectRx is
under no restriction for the use of the design of the interior of the
Instrument in any area outside of that licensed exclusively to Roche
Diagnostics.
11.10 No modification, amendment, extension or waiver of this Agreement or
any provision hereof shall be binding or effective unless in writing
and signed by duly authorized representative of each of the parties.
11.11 SpectRx agrees that, during the term of the Agreement, it will not
enter into any agreement to develop or manufacture a non-invasive
diabetes-screening instrument using the same or similar technology as
employed in the Instrument other than with Roche Diagnostics or its
Affiliate(s).
11.12 Further, SpectRx represents and warrants that it is under no
obligation, nor will It assume any obligation, which would in any way
interfere with or be inconsistent with or present a conflict or
interest with the services to be furnished by SpectRx under this
Agreement.
11.13 This Agreement shall be construed according to the laws of the State of
Georgia. Venue for any litigation under this Agreement shall be state
court, Gwinnett County, Georgia.
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<PAGE> 16
11.14 Within twenty-four (24) hours of becoming aware of an inspection of its
facilities by the Federal Food and Drug Administration (FDA), SpectRx
shall notify Roche Diagnostics in writing of such inspection.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives.
SPECTRX, INC.
By:
--------------------------------
Title:
-----------------------------
ROCHE DIAGNOSTICS CORPORATION
By:
--------------------------------
Title:
-----------------------------
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<PAGE> 17
Exhibit A
Specification:
System Specification Document, Magnum Diabetes Screening Instrument, Project
227, dated 4/5/99.
[*]
(*) CONFIDENTIAL TREATMENT REQUESTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED
PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION.
Page 17
<PAGE> 18
Exhibit B
Purchase Price
SpectRx to provide revised proposal
Page 18
<PAGE> 19
For discussion
purposes only
Exhibit B
Purchase Price
1. The initial Instrument purchase prices shall be governed by the Volume Based
Production Cost Summary (attached hereto as Exhibit B-1) during the period from
initial product shipments until (i) Product Launch has occurred as defined in
Section 1.5 of the Development Agreement, (ii) the forecast from Roche
Diagnostics per Section 2.3 of the Supply Agreement equals or exceeds [*]
Instruments, and (iii) purchase orders issued by Roche Diagnostics for the
first [*] months of said forecast equals or exceeds [*] Instruments (the month
during which the latest to occur of (i), (ii), or (iii) above being referred to
herein as the "First Volume Pricing Month"). Instruments governed by this
Section 1 are collectively referred to as "Period One Instruments".
2. The purchase price for the [*] Instruments beyond the Period One
Instruments purchased pursuant to this Supply Agreement shall be [*] per
Instrument. Such [*] Instruments are collectively referred to herein as the
"Period Two Instruments". The price set forth hereinabove for the Period Two
Instruments shall be adjusted in the same manner and same times as the
adjustments to the Unadjusted Maximum Prices as provided in, and using the
formulae set forth in, subparagraphs (i) and (ii) of Section 4 hereof.
(*) CONFIDENTIAL TREATMENT REQUESTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED
PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION.
<PAGE> 20
3. For all other Instruments delivered during or prior to the [*] month
succeeding the First Volume Pricing Month (i.e., other than Period Two
Instruments) and subject to the adjustments provided for in Section 6 hereof,
the price for such Instruments shall be computed and invoiced by SpectRx using
the Transfer Price Formula (as defined in Section 5 below) based on costs
constituting SpectRx's then current variable "run rate," measured over a
reasonable prior period, for each of the cost components comprising the
Transfer Price Formula (which will approximate SpectRx's actual costs relating
to such Instruments but may vary slightly due to timing). Notwithstanding the
foregoing, in no event shall the price for such Instruments exceed the Maximum
Price therefor, if any (as defined in Section 4 below). In computing the "run
rate" for its costs, SpectRx may in good faith make adjustments thereto to take
into account anticipated increases or decreases in such costs. When requested
by Roche Diagnostics, SpectRx will provide Roche Diagnostics with reasonable
documentation supporting its calculations, and promptly respond to further
reasonable inquiries by Roche Diagnostics for same. Instruments governed by
this Section 3 are collectively referred to as "Period Three Instruments".
4. The maximum price for the Period Three Instruments shall be as follows:
(a) [*] per Instrument for the first [*] Period Three Instruments
and for all further Period Three Instruments, if any, in excess of
such [*] Instruments required to be delivered (or held for
Page 2 of 6
(*) CONFIDENTIAL TREATMENT REQUESTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED
PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION.
<PAGE> 21
delivery) prior to the end of the [*] month succeeding the First Volume
Pricing Month;
(b) [*] for the next [*] Period Three Instruments beyond the Instruments
described in subsection (a) and for all further Instruments, if any, in
excess of such [*] Instruments required to be delivered (or held for
delivery) during the [*] period succeeding the [*] period described in
subsection (a); and
(c) [*] for further Period Three Instruments beyond the Instruments described
in subsection (b).
The prices set forth above in subsections (a), (b) and (c) are referred to
herein as the "Unadjusted Maximum Prices" and are subject to the following
adjustments:
(i) Commencing at the end of the [*] month succeeding the month of
delivery of the first Instruments ordered by Roche Diagnostics
pursuant to Section 2.4 of this Supply Agreement (such month being
referred to herein as the "First Month"), the Unadjusted Maximum
Prices shall be increased or decreased to give effect to any increase
or decrease in the unit price for the [*] to be used in the
Instrument as follows: The Unadjusted Maximum Price for any
Instrument (or in respect of any lot of Instruments) shall be (i)
increased by a number equal to a quotient, the numerator of which is
the excess of the cost of the [*] installed in such Instrument (or in
respect of any lot
Page 3 of 6
(*) CONFIDENTIAL TREATMENT REQUESTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED
PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION.
<PAGE> 22
of Instruments, the average cost of the [*] installed in such lot of
Instruments) over [*] per [*], and the denominator is [*]; and (ii)
decreased by a number equal to a quotient, the numerator is the excess
of [*] per [*] over such cost and the denominator is [*].
(ii) The Unadjusted Maximum Prices shall be adjusted for the [*] month
period commencing at the end of the [*] month succeeding the First
Month, and for each successive [*] period, on a proportionate basis,
for changes in the [*] as such index changes during the prior [*]
months.
The price as determined by applying the foregoing adjustments to the
applicable Unadjusted Maximum Price is referred to herein as the "Maximum
Price."
5. The Transfer Price Formula shall determine price as to Instruments, subject
to adjustment as provided for in the immediately succeeding paragraph, on a
per Instrument basis by adding (a) the sum of (i) material costs, (ii)
direct assembly labor, (iii) packaging and labeling costs, (iv) cost of
instruction manuals, (v) depreciation and amortization, and (vi) factory
overhead attributable thereto, in each case using standard cost accounting
measures; (b) an amount equal to such total under subsection (a), divided
by [*], and then multiplied by [*] (so as
Page 4 of 6
(*) CONFIDENTIAL TREATMENT REQUESTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED
PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION.
<PAGE> 23
to represent a [*] margin in respect thereto); and (c) Georgia Tech
Research Corporation royalties.
6. The purchase price as computed pursuant to the Transfer Price Formula
shall be subject to increase to add a further component in respect of
improvement in costs, over current estimated costs, as follows: As costs
are improved (after giving effect to costs required to implement cost
improvement) so as to result in a price as calculated pursuant to the
Transfer Price Formula which is lower than the Maximum Price therefor (or
if there is no applicable Maximum Price, lower than the Maximum Price set
forth in Section 4(c) hereof), then [*] of the purchase price impact of
such cost improvement shall be added to the purchase price, although in no
event shall the purchase price exceed the Maximum Price therefor, if
applicable. The Maximum Prices referenced in the preceding sentence refer
to the prices after giving effect to the adjustments thereto provided for
in subparagraphs (i) and (ii) of Section 4 hereof.
7. After the [*] month succeeding the First Volume Pricing Month,
(a) There shall no longer be a Maximum Price and the purchase
price for Instruments to be delivered thereafter shall be
calculated using the Transfer Price Formula.
(b) If the purchase price as so calculated pursuant to subsection
(a) above is less than or equal to the Maximum Price in effect
immediately prior to the end of the [*] period identified
Page 5 of 6
(*) CONFIDENTIAL TREATMENT REQUESTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED
PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION.
<PAGE> 24
above multiplied by [*] of such Maximum Price, then the purchase price as
so calculated shall be the purchase price.
(c) If the condition described in subsection (b) above is not met (i.e., the
price is greater than the [*] benchmark), then the parties will meet, and,
taking into account all relevant considerations, including the margins
enjoyed by the parties during the term of the Supply Agreement to date,
shall negotiate in good faith the purchase price for Instruments to be
delivered subsequent to such 36th month. If the parties are unable to
agree as to price, the matter will be referred to arbitration for
resolution in accordance with the provisions of Section 11.6(c) of the
Supply Agreement. The arbitrator shall be required to appoint a special
master, with business experience concerning medical devices deemed
relevant by the arbitrator, to assist and advise the arbitrator with the
determination of the purchase price for the Instruments.
Page 6 of 6
(*) CONFIDENTIAL TREATMENT REQUESTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED
PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION.
<PAGE> 25
MAGNUM VOLUME-BASED PRODUCTION COST SUMMARY
[TABLE]
[*]
[*] CONFIDENTIAL TREATMENT REQUESTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED
PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION.
<PAGE> 26
Exhibit C
Long-lead Time Component Parts
SpectRx to provide list
[*]
Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.
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<PAGE> 27
Exhibit D
Certain Tooling
PLASTIC PARTS TOOLING LIST
<TABLE>
<CAPTION>
SPECTRX PART
NO. PART DESCRIPTION ESTIMATED COST
----------- ---------------- --------------
<S> <C> <C>
3001336 Case, Front [ * ]
3001319 Case, Rear [ * ]
3001321 Case, Left [ * ]
3001320 Case, Right [ * ]
3001462 Case, Front Insert [ * ]
FAMILY TOOL [ * ]
3001398 Pod Base
3001399 Pod Upper
FAMILY TOOL [ * ]
3001428 Door, PCMCIA
3001463 Connector Block
3001402 Pod Feet
FAMILY TOOL [ * ]
3001333 Fixation Cover
3001332 Base, Fixation Target
3001461 Shutter
FAMILY TOOL [ * ]
3001330 Button, Sensor
300147 Base, Chin Rest
3001349 Chin Rest
TOTAL [ * ]
</TABLE>
(*) Confidential treatment requested pursuant to a request for
confidential treatment filed with the Securities and Exchange
Commission. Omitted portions have been filed separately with the
Commission.
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<PAGE> 28
Exhibit E
Patent Evaluation
SpectRx to provide list
[*]
(*) Confidential treatment requested pursuant to a request for
confidential treatment filed with the Securities and Exchange
Commission. Omitted portions have been filed separately with the
Commission.
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<PAGE> 29
Exhibit F
SERVICE COMMITMENT:
SpectRx, Inc. will provide a loaner diabetes screening instrument to
the customer in the event of an Instrument failure during the first
year warranty period, or during the warranty extension period. The
customer's instrument will be returned to a SpectRx authorized service
center for repair. Loaner instruments will be supplied by, and shall
remain the property of SpectRx, for the following markets:
United States, Canada, and the European communities.
PROCESS:
I. ROCHE DIAGNOSTICS CORPORATION
The initial one year warranty will commence on the date of installation
as indicated on the installation report returned to the distributor or
Roche Diagnostics. Roche Diagnostics will provide "First Line"
telephone customer support in the United States, Canada, and the
European community. SpectRx will supply a "First Line" troubleshooting
guide, and train the Roche Diagnostics customer support personnel in
it's use. This guide will be utilized for failure determination prior
to requesting a loaner instrument be sent to the customer site under
the loaner/warranty exchange program. Roche Diagnostics must obtain an
RSA (Return Service Authorization) number from the SpectRx service
center prior to shipment.
II. INSTRUMENT REPAIR - SERVICE COMMITMENT - YEAR ONE
Step 1 - Roche Diagnostics receives telephone call from the customer
via a service/support "help" line. Customer support determines the
failure using the "First Line" troubleshooting guide. Customer support
then calls SpectRx to obtain an RSA number for a loaner Instrument. The
loaner instrument is shipped by SpectRx to the customer within
twenty-four (24) hours of receiving the call from Roche Customer
support.
Step 2 - The customer receives the loaner instrument and ships their
defective instrument to SpectRx, utilizing the shipping container from
the loaner.
NOTE: The shipping carton will be heavy duty and designed for
ease of use with sufficient packing for safe shipment of the
instruments. Included in the carton will be a supply of shipping
instructions, documents, and labels for the customer's use.
Step 3 - The instrument is received at the SpectRx authorized Service
Center.
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<PAGE> 30
Step 4 - The instrument is repaired and checked for proper operation
and readied for shipment back to the customer.
Step 5 - The instrument is returned to the customer.
Step 6 - The customer receives the repaired instrument and places it
into operation. The SpectRx loaner instrument is packaged in the
shipping carton and readied for shipment
Step 7 - The customer ships the instrument back to SpectRx or to
another specified location.
NOTE: SpectRx will arrange and manage loaner instrument pick
up and delivery to/from the customer.
III. SERVICE DEPOTS
a) The main Service Center at SpectRx will repair units using new
or good-as-new exchange parts with the goal of a one day
turnaround for the United States and Canadian markets.
b) SpectRx will establish a European service depot within 6
months of product launch in Europe to support the European
community market. This depot will be furnished with new or
reworked subassemblies on an exchange basis, i.e., PC boards,
EO bench, etc..
c) All SpectRx Service Depots will support both the end user of
the instrument and the distributors authorized to sell it.
IV. WARRANTY EXTENSION AGREEMENTS
Warranty Extension Agreements will be available through SpectRx at
$750.00 U.S. per annum. If these agreements are sold "up-front" at
point of sale, a 10% discount will be applied. If the agreements are
not purchased at point of sale, they may be purchased anytime during
the initial warranty period.
V. OUT OF WARRANTY SERVICE
a) Repair time and materials used billed as incurred.
1. Customer returns the instrument to the Authorized
SpectRx Service depot at their expense.
2. Loaner units are available for [ * ]on request with
shipping billed to the requesting customer.
3. Minimum one-hour bench repair time billable at
$[ * ] Additional time will be billed at [ * ] per
hour or portion thereof. Hours will be rounded up.
4. Parts used will be billed at the standard "cost plus"
charge.
Page 23
(*) Confidential treatment requested pursuant to a request for
confidential treatment filed with the Securities and Exchange
Commission. Omitted portions have been filed separately with the
Commission.
<PAGE> 31
5. All out of warranty service repairs will carry a
minimum 90 day warranty for the same malfunction.
Certain repairs may carry a longer warranty at the
discretion of SpectRx.
6. Service pricing and policy will be reviewed by
SpectRx annually and may be adjusted based on the
previous years cost/failure data analysis.
VI. ACCESSORIES
All accessories to the instrument i.e. printers, data capture devices,
and storage peripherals from other manufacturers will be serviced by
the brand manufacturer.
VII. SECOND TIER MARKETS
SpectRx will offer to all exclusive and non-exclusive distributors
outside of the named major markets, exchange loaner instruments for
purchase. If a distributor chooses not to stock a loaner instrument(s),
the extra cost for expedited shipping of customer instruments needing
repair will be the responsibility of the distributor.
Page 24
<PAGE> 32
Exhibit G
Labeling
115/230 V~ 40 VA 50/60 Hz
Fuse 5 mm x 20 mm 2.5 amp 250 Volt AC Fuse
Co-developed and manufactured by SpectRx Inc. for Roche Diagnostics
In 1/16 inch tall Font
Located above the power cord, fuse and on/off switch on the left side of the
instrument
Page 25
<PAGE> 33
Exhibit H
BMC3-00151-QA
Page 26
<PAGE> 1
EXHIBIT 11.1
SpectRx, Inc.
COMPUTATION OF LOSS PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Six Months
June 30, June 30
--------------------- ---------------------
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Loss $(2,039) $(2,467) $(3,995) $(4,278)
Weighted average Common Stock
outstanding during the period 7,929 8,025 7,839 8,021
Basic and Diluted
------- ------- ------- -------
Loss Per Share Basic and Diluted $ (0.26) $ (0.31) $ (0.51) $ (0.53)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SPECTRX INC. FOR THE SIX MONTHS ENDED JUNE 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,209
<SECURITIES> 0
<RECEIVABLES> 341
<ALLOWANCES> 0
<INVENTORY> 400
<CURRENT-ASSETS> 2,297
<PP&E> 1,941
<DEPRECIATION> 1,006
<TOTAL-ASSETS> 3,746
<CURRENT-LIABILITIES> 1,159
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 2,579
<TOTAL-LIABILITY-AND-EQUITY> 3,746
<SALES> 610
<TOTAL-REVENUES> 100
<CGS> 743
<TOTAL-COSTS> 743
<OTHER-EXPENSES> 4,322
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (22)
<INCOME-PRETAX> (4,278)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,278)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,278)
<EPS-BASIC> (0.53)
<EPS-DILUTED> (0.53)
</TABLE>
