<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 SEPTEMBER 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 September 30, 1999, was 8,044,693.
<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 SEPTEMBER 30, 1999 .......................................... 3
STATEMENTS OF OPERATIONS - THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 .......... 4
STATEMENTS OF CASH FLOWS - NINE MONTHS ENDED SEPTEMBER 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. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .......................... 19
PART II. OTHER INFORMATION ......................................................................... 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, SEPTEMBER 30,
1998 1999 (UNAUDITED)
------------ ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash & Cash Equivalents $ 4,962 $ 964
Accounts Receivable 683 775
Inventory 404 452
Other Current Assets 119 72
---------- ----------
Total Current Assets 6,168 2,263
PROPERTY & EQUIPMENT, Net of Accumulated Depreciation of $837 and
$1,092 in 1998 and 1999 respectively 973 895
---------- ----------
OTHER ASSETS
Other Assets 42 22
Due from related parties 471 492
---------- ----------
Total Other Assets 513 514
---------- ----------
TOTAL ASSETS $ 7,654 $ 3,672
========== ==========
LIABILITIES & STOCKHOLDERS EQUITY
CURRENT LIABILITIES
Accounts Payable $ 436 $ 420
Accrued Liabilities 399 1,330
---------- ----------
Total Current Liabilities 835 1,750
CUSTOMER ADVANCE 0 381
STOCKHOLDERS' EQUITY
Common Stock 8 8
Additional paid-in-capital 25,761 25,825
Deferred comp (134) (77)
Accumulated deficit (18,785) (24,184)
Notes Receivable from officers (31) (31)
---------- ----------
Total Stockholders' equity 6,819 1,541
---------- ----------
TOTAL LIABILITIES & EQUITY $ 7,654 $ 3,672
========== ==========
</TABLE>
<PAGE> 4
UNAUDITED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SPECTRX
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30,
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUE
Product Sales $ 194 $ 380 $ 483 $ 990
Collaborative agreements 183 1,000 333 1,100
------------------------- --------- ---------
TOTAL 377 1,380 816 2,090
------------------------- --------- ---------
EXPENSES
Cost of Sales 382 454 1,093 1,197
Research & development 1,063 1,212 3,038 3,783
Sales & marketing 232 221 804 666
General & administrative 564 634 1,715 1,940
--------- --------- --------- ---------
Total 2,241 2,521 6,650 7,586
------------------------- --------- ---------
Operating (loss) (1,864) (1,141) (5,834) (5,496)
OTHER EXPENSE (INCOME) (633) 3 (325) 14
INTEREST EXPENSE (INCOME) (96) (23) (379) (111)
------------------------- -------------------------
NET LOSS $ (1,135) $ (1,121) $ (5,130) $ (5,399)
========= ========= ========= =========
NET (LOSS) PER SHARE
BASIC $ (0.14) $ (0.14) $ (0.65) $ (0.67)
========= ========= ========= =========
DILUTED $ (0.14) $ (0.14) $ (0.65) $ (0.67)
========= ========= ========= =========
WEIGHTED COMMON EQUIVALENT
SHARES OUTSTANDING
BASIC 8,001 8,030 7,897 8,024
========= ========= ========= =========
DILUTED 8,001 8,030 7,897 8,024
========= ========= ========= =========
</TABLE>
<PAGE> 5
SPECTRX, INC.
UNAUDITED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
1998 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ............................................................... $ (5,130) $ (5,399)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................... 277 275
Minority Interest in Loss of FluorRx ........................ (329) 0
Amortization of deferred compensation ....................... 63 57
Changes in assets and liabilities:
Accounts receivable .................................. 193 (92)
Inventory ............................................ (144) (48)
Other assets ......................................... (98) 47
Due from related parties ............................. (22) (21)
Accounts payable ..................................... (360) (16)
Accrued liabilities .................................. 142 931
---------- ----------
Total adjustments ................................. (278) 1,133
Net cash used in operating activities ............. (5,408) (4,266)
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment ....................... (280) (177)
---------- ----------
Net cash used in investing activities ............. (280) (177)
---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock (net of issuance costs) .................. 95 64
Note Payable ...................................................... 0 381
---------- ----------
Net cash provided by financing activities ......... 95 445
---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .................................................. (5,593) (3,998)
CASH AND CASH EQUIVALENTS, beginning of period ......................... 12,124 4,962
---------- ----------
---------- ----------
CASH AND CASH EQUIVALENTS, end of period ............................... $ 6,531 $ 964
========== ==========
</TABLE>
<PAGE> 6
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 September 30, 1999, the consolidated results of operations for the three
months and nine months ended September 30, 1998 and 1999, and the consolidated
cash flows for the nine months ended September 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 nine months ended September 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
45%. 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 nine months ended
September 30, 1999 exclude $284,000 in losses which represents the Company's 45%
equity in the loss of FluorRx. Cumulative suspended equity losses as of
September 30, 1999 amount to $1,075,000.
3. COMPREHENSIVE INCOME
The Company currently has no other Comprehensive Income items as defined
by SFAS No. 130.
4. SUBSEQUENT EVENTS
The Company announced in October, 1999, that it had been awarded a
$292,000 grant from the Centers for Disease Control and Prevention (CDC) to
adapt its continuous glucose monitoring technology to monitor blood sugar levels
of children and elderly people who have diabetes. The Company expects to receive
amounts under the grant over the next 12 months.
<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 September 30, 1999, as a result of a subsequent
financing, the Company's interest in FluorRx was 45%.
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 September 30,
1999, the Company had an accumulated deficit of approximately $24.2 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 several items. In July it announced that it had entered into a new
license and marketing agreement with Roche Diagnostics for the diabetes
detection device. In August, the Company and Welch Allyn, its partner for the
development of the cervical cancer detection device, announced that the
prototypes under development had shown the potential to identify cervical
cancer without taking a tissue sample and that the companies planned expanded
studies. In September SpectRx announced achievement of milestones related to
diabetes detection including the completion of key device tests and the
delivery of units to Roche.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998.
General. Net losses remained constant at $1.1 million during the three
months ended September 30, 1999 as compared to the same period in 1998 due to an
increase in milestone revenues offset by a decrease in other revenue from the
deconsolidation of FluorRx, Inc. The Company expects similar net losses to
continue.
Revenue. The Company has historically received the majority of its 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,
and began shipping its infant jaundice product to its distributor in Canada
during the quarter ended September 30, 1998. Revenue increased to $1,380,000 for
the quarter ended September 30, 1999 from $377,000 for the same period of 1998.
Milestone revenue, which is event-based rather than sales-based, increased to
$1,000,000 during the three months ended September 30, 1999 from $183,000 during
the same period in 1998 primarily due to milestones accomplished on SpectRx's
diabetes detection device.
Cost of Sales. Cost of sales was $454,000 for the three months ended
September 30, 1999 versus $382,000 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 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 $1,212,000 during the three months ended September
30, 1999 from approximately $1,063,000 during the same period in 1998. The
increase in research and development expenses was primarily due to expansion of
research in glucose monitoring, diabetes 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 remained level
at $221,000 during the three months ended September 30, 1999 from approximately
$232,000 during the same period in 1998. Marketing expenses, however, are
expected to increase in the future as BiliChek(TM) sales expand geographically.
General and Administrative Expenses. General and administrative expenses
increased to approximately $634,000 during the three months ended September 30,
1999 compared to the approximately $564,000 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 decreased to
$20,000 during the three months ended September 30, 1999 from $729,000 during
the same period in 1998. This decrease results from a combination of two
elements: (1) a decrease in other income from the 3rd quarter of 1998, when
SpectRx realized $633,000 from not consolidating FluorRx losses because the
Company's ownership dropped below 50% during that quarter and (2) a decrease in
interest income to $23,000 for the three months ended September 30, 1999 from
$96,000 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998.
General. Net losses increased slightly to approximately $5.4 million
during the nine months ended September 30, 1999 from approximately $5.1 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 $2,090,000 in the nine months ended
September 30, 1999 versus $816,000 in the same period in 1998 is a result of
having realized product revenue for three quarters of 1999 versus two in 1998
($990,000 in 1999 vs. $483,000 in 1998), and the achievement of greater
milestones ($1,000,000 in 1999 vs. $333,000 in 1998.)
Cost of Sales. Cost of sales was $1,197,000 for the nine months ended
September 30, 1999 versus $1,093,000 during the same period of 1998. The
increase in cost is due to increased unit sales in 1999; excess capacity charges
in production decreased in 1999 as compared to the same period in 1998.
Research and development expenses. Research and development expenses
increased to approximately $3.8 million during the nine months ended September
30,1999 from approximately $3.0 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 $666,000 during the nine months ended September 30, 1999 from
approximately $804,000 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 $1.9 million during the nine months ended
September 30,1999 compared to the approximately $1.7 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 decreased to
$97,000 during the nine months ended September 30, 1999 from $704,000 during the
same period in 1998. This decrease results from lesser interest income and no
positive effect from the deconsolidation of 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 September 30, 1999, the
Company received approximately $25.8 million in net proceeds from sales of its
debt and equity securities. At September 30, 1999, the Company had cash of
approximately $1.0 million and working capital of approximately $0.5 million.
The Company completed an initial public offering of its common stock on July 7,
1997 which resulted in net proceeds received by the Company, before expenses
related to the transaction, of approximately $14.0 million. The Company
currently invests its excess cash balances primarily in short-term,
investment-grade, interest-bearing obligations until such funds are utilized in
operations. Substantial capital will be required to develop the Company's
products, including completing product testing and clinical trials, obtaining
all required United States and foreign regulatory approvals and clearances,
commencing and scaling up manufacturing and marketing its products. Any failure
of the Company's collaborative partners to fund its development expenditures
would have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition to funds that the Company expects to be provided by its
collaborative partners, the Company may be required to raise additional funds
through public or private financing, additional 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 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 had significant responsibility for undertaking or funding
the development, clinical testing, regulatory approval process and has the
responsibility for sales 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 September 30,
1999, the Company had an accumulated deficit of approximately $24.2 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 other modifications that could affect
safety and efficacy, additional clearances or approvals will be required
<PAGE> 13
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 arrangement with Roche Diagnostics. The Company has
license agreements with the University of Texas M.D. Anderson
<PAGE> 14
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. Manufacturers offer such discounts or rebates to
expand the use of their products and thus increase the market for the
<PAGE> 15
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.
Little 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 larger 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 expands 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. 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 September 30, 1999
approximately 32% 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 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 September 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: November 15, 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 DESCRIPTION
NO. ---------------------------------------------------------------------------------------
- -------------
<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.
</TABLE>
<PAGE> 23
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NO. ---------------------------------------------------------------------------------------
- -------------
<S> <C>
10.25A **(2) Development and License Agreement, dated July 13, 1999, between Roche Diagnostics
Corporation and the Company.
10.25B**(2) Supply Agreement, dated July 13, 1999, between Roche Diagnostics Corporation
and the Company.
11.1 Calculation of earnings per share.
21.1 (1) Subsidiaries of the Registrant.
23.1 (4) Consent of independent accountants.
24.1 Power of Attorney (included at signature page.)
27.1 Financial Data Schedule (for SEC use only).
</TABLE>
- -----------------
* Confidential treatment granted for portions of these agreements.
** Confidential treatment requested for portions of 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) 10Q for the quarter ended June 30, 1999 filed August 13, 1999.
<PAGE> 1
EXHIBIT 11.1
SpectRx, Inc.
COMPUTATION OF LOSS PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
September 30, September 30
-------------------------- --------------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Loss $ (1,135) $ (1,121) $ (5,130) $ (5,399)
Weighted average Common Stock
outstanding during the period 8,001 8,030 7,897 8,024
Basic and Diluted
-------- -------- -------- --------
Loss Per Share Basic and Diluted $ (0.14) $ (0.14) $ (0.65) $ (0.67)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SPECTRX, INC. FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 964
<SECURITIES> 0
<RECEIVABLES> 775
<ALLOWANCES> 0
<INVENTORY> 452
<CURRENT-ASSETS> 2,263
<PP&E> 1,987
<DEPRECIATION> 1,092
<TOTAL-ASSETS> 3,672
<CURRENT-LIABILITIES> 1,750
<BONDS> 381
0
0
<COMMON> 8
<OTHER-SE> 1,533
<TOTAL-LIABILITY-AND-EQUITY> 3,672
<SALES> 990
<TOTAL-REVENUES> 2,090
<CGS> 1,196
<TOTAL-COSTS> 1,196
<OTHER-EXPENSES> 6,389
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (111)
<INCOME-PRETAX> (5,399)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,399)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,399)
<EPS-BASIC> (0.67)
<EPS-DILUTED> (0.67)
</TABLE>
