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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
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.
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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>
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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)
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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
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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)
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Total Stockholders' equity 6,819 2,587
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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 $ 304 289 610
Collaborative agreements 100 0 150 100
------- ------- ------- -------
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
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<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
due to having no development milestones during the three months ended June 30,
1999, as compared to $100,000 of milestone revenue during the same period 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 is directly related to product revenue, a portion of the cost of sales
represents excess capacity production charges which were higher in this period
in 1998. 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 second 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 24, 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**(5) Development and License Agreement, dated July 13, 1999, between Roche Diagnostics Corporation and the Company.
10.25B**(5) Supply Agreement, dated July 13, 1999, between Roche Diagnostics Corporation and the Company.
11.1(5) 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(5) 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.
(5) Incorporated by reference to the exhibit filed with the Registrant's
quarterly report on Form 10-Q for the quarter ended June 30, 1999, filed
August 16, 1999.
