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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 2000.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________.
Commission File Number: 0-22179
SPECTRX, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-2029543
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
6025A Unity Drive, Norcross, GA 30071
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (770) 242-8723
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosures of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant was approximately $67 million as of February 28, 2001, based
upon the average of the high and low prices of the Registrant's Common Stock
reported for such date by the Nasdaq National Market.
As of February 28, 2001, the Registrant had outstanding 8,512,642
shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE.
Parts of the following documents are incorporated by reference in Part
III of this Form 10-K Report: Proxy Statement for Registrant's 2001 Annual
Meeting of Stockholders -- Items 10, 11, 12 and 13.
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PART I
ITEM 1. BUSINESS
OVERVIEW
We are a specialty point-of-care medical diagnostics company that
employs leading-edge biophotonic technologies to provide painless, non-invasive
and minimally invasive alternatives to blood and tissue sampling procedures.
Biophotonic technology is the use of light and other forms of energy to access
the human body to diagnose and monitor disease. We have developed a product that
provides a non-invasive alternative to the conventional blood test for detecting
and monitoring infant jaundice. We are also developing products that we believe
will provide less invasive and painless alternatives to products that are
currently available for conventional diabetes detection, glucose monitoring and
cancer detection. We believe these products can improve patient well-being and
reduce healthcare costs since they reduce or eliminate pain, are convenient to
use and provide rapid results at the point of care. We have entered into
collaborative arrangements with the following companies to help develop,
commercialize and sell the following products:
COLLABORATIVE PARTNER PRODUCT BEING DEVELOPED
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Respironics, Inc. Infant Jaundice Detection and Monitoring
Welch Allyn, Inc. Cancer Detection
Abbott Laboratories Glucose Monitoring
Roche Diagnostics Diabetes Detection
OUR BUSINESS STRATEGY
We exist to provide innovative medical products that improve the quality
of life. Our mission is to build a profitable business that develops and
commercializes medical products that improve people's lives and grows
stockholder value. To achieve this mission, we are pursuing the following
business strategy:
- Focus on Current Programs. We intend to expand the market for
our current product by using focused marketing techniques,
leveraging clearance for expanded claims for use of the
product, and developing product improvements. We will also
continue to advance our products being developed to
commercialization. We intend to implement this strategy by:
- leveraging the expertise of our collaborative
partners;
- seeking clearance for these products where possible
from the United States Food and Drug Administration,
or FDA;
- focusing and streamlining our internal product
development capabilities; and
- developing our sales, marketing and manufacturing
capabilities.
- Develop Additional Products. We need to ensure a future
product pipeline. We intend to leverage our proprietary
biophotonic technologies to develop additional products from
our current product and our other product development
activities. We believe that our development activities in
glucose monitoring and cancer detection have significant
promise for additional product offerings that use our
biophotonic technologies. For example, we believe our
interstitial fluid sampling technology may be applicable for
monitoring compounds other than glucose. We also believe that
the technology used in the cancer detection products we are
developing can be used for the detection of other cancers.
- Collaborate with Market Leaders. We have established
collaborative arrangements with Abbott, Roche, Respironics and
Welch Allyn to develop and commercialize our products. We may
seek to establish strategic relationships with other leading
companies for the development, commercialization and
introduction of additional products, if it is the best
path to commercialization for those products.
- Address Large Market Opportunities. We believe that large
market opportunities exist for products using our proprietary
biophotonic technologies. We intend to address these
opportunities by selectively developing future products that
incorporate a disposable component and qualify for third-party
reimbursement.
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INDUSTRY OVERVIEWS
INFANT JAUNDICE
Background
Infant jaundice is a condition that primarily affects newborns within
the first three to ten days of life. If left untreated, in extreme cases infant
jaundice may lead to brain damage or death. Jaundice is characterized by a
yellowing of the skin and eyes caused by an excess of bilirubin in the body.
Bilirubin is a normal waste product resulting from the breakdown of red blood
cells that is removed from a healthy body by the liver. Before birth, a baby's
bilirubin is processed by the mother's liver. After birth, an infant must
eliminate bilirubin on its own. It may take the infant's system several days to
begin eliminating the bilirubin as fast as it is produced. Infants who are born
prematurely, who are underfed, or who belong to some ethnic groups are at
increased risk of developing jaundice. The initial screening for jaundice is the
observation of yellow skin. This is a subjective determination that is prone to
errors due to differing skin colors and gestational ages. If a baby is selected
for further jaundice testing, the current procedure requires that a blood sample
be obtained from the infant, usually by lancing the infant's heel. This can be a
traumatic and painful process for the infant. Since jaundice normally presents
in infants 36 to 72 hours after birth, infants who are sent home after a short
hospital stay, which commonly occurs under managed care guidelines in the United
States, are at risk because the condition may not have presented before they are
released.
The Infant Jaundice Screening and Monitoring Market
According to published reports, about 60% of the four million newborns
each year in the United States have recognizable jaundice. Annually, about 1.7
million newborns receive at least one blood test for bilirubin levels. Of those
newborns tested, about 700,000 have elevated bilirubin levels, and a portion of
these newborns will receive additional tests. The cost to the patient for a
bilirubin test ranges from $22.25 to $37.75, and the laboratory processing cost
usually ranges from $10.00-$12.00. About 10% of those infants in the United
States diagnosed with jaundice will undergo phototherapy, a treatment that
converts bilirubin into a water soluble form that can be processed and
eliminated from the infant's system. We believe that the average newborn under
active phototherapy treatment receives three to four bilirubin monitoring tests.
Our Non-Invasive Infant Jaundice Detection and Monitoring Product (Point of Care
Bilirubin Testing)
Our infant jaundice product, trademarked the BiliChek in the United
States and the BiliCheck internationally, is based on a form of biophotonic
technology. This product measures bilirubin regardless of the baby's skin color
or gestational age. The product is designed to provide rapid, point-of-care
bilirubin measurements and to serve as an initial screening and ongoing
monitoring device. We believe that, in many cases, the BiliChek has the
potential to replace the painful heel stick procedure currently utilized.
The design of the BiliChek consists of a hand-held, battery-operated
instrument, which sits in a compact charger base when not in use. This
instrument incorporates a microspectrometer to collect biophotonic information
from the skin as well as a proprietary, disposable calibration element,
trademarked the BiliCal. After calibration, the instrument is applied to the
skin of the infant to produce a measureable value of bilirubin, which generally
takes less than one minute. During this time the bilirubin level is measured by
collecting the light reflected from the skin and analyzing it using a
proprietary algorithm that adjusts for interfering factors such as skin color
and gestational age.
In 1998, we received ISO 9001/EN 46001 certification and were granted
the right to use the CE mark. This certification and mark, which demonstrates
compliance with specified standards of quality, allowed us to begin selling the
BiliChek in Europe. In April 1998, we began selling BiliChek units to
international distributors. The BiliChek is currently being marketed in more
than 60 countries worldwide. In March 1999, the BiliChek received clearance from
the FDA for
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Respironics to market the product in the U.S., which began after Respironics
obtained the initial FDA clearance. During 2000, about 29% of BiliChek units and
14% of BiliCal units were sold to Respironics for sales in the United States and
Canada.
In January 2000, Respironics reported it had filed a premarket
notification submission with the FDA for expanded claims for use of the BiliChek
during phototherapy. In August 2000, the FDA requested that additional clinical
data be collected to support these expanded claims for use, which was supplied
in January 2001. In March 2001, the FDA granted clearance for expanded claims
for the BiliChek, including use during and after phototherapy. In November 2000,
the BiliChek was approved for third-party reimbursement in the U.S. under CPT
code 88400. We believe that Respironics plans to implement a major marketing
effort for the BiliChek in the U.S. now that it has received the additional
FDA clearance.
Our infant jaundice product was developed under a collaborative
arrangement with Respironics. Under the terms of the arrangement, we developed
and manufacture the product, and Respironics paid and will continue to pay
specified costs associated with additional product development and clinical
trials. Respironics has been granted a license to market and sell the product in
the United States and Canada, while we retain the right to sell the product in
all other geographic markets. Respironics retains a significant degree of
discretion regarding the timing of the activities for which it has
responsibility and the amount and quality of financial, personnel and other
resources that it devotes to these activities. Accordingly, we cannot be sure
that the marketing schedules will be met, if at all.
NON-INVASIVE CANCER DETECTION
Background
According to the American Cancer Society, cancer is a group of many
related diseases. All forms of cancer involve the out-of-control growth and
spread of abnormal cells. Normal body cells grow, divide, and die in an orderly
fashion. Cancer cells, however, continue to grow and divide, and can spread to
other parts of the body. In America, half of all men and one-third of all women
will develop cancer during their lifetimes. According to the American Cancer
Society, the sooner a cancer is found, and the sooner treatment begins, the
better a patient's chances are of a cure. We began investigating the
applications of our technologies to cancer detection before 1997, when we
initiated a market analysis for these uses. We concluded that our biophotonic
technologies had applications to detect a variety of cancers that could be
exposed to light. We selected cervical cancer and skin cancer from a list of the
ten most attractive applications as categories of cancer to pursue initially.
Cervical Cancer
Cervical cancer is a cancer that begins in the lining of the cervix,
the lower part of the uterus. Cervical cancer forms over time and may spread to
other parts of the body if left untreated. There is generally a gradual change
from a normal cervix to a cervix with precancerous cells to cervical cancer. For
some women, precancerous changes may go away without any treatment. While the
majority of precancerous changes do not advance to cancer, if these precancers
are treated, true cancers can be prevented. The Pap smear, where a sample of
cervical tissue is placed on a slide and observed in a laboratory, is currently
the most common form of cervical cancer screening.
Cervical Cancer Market
The American Cancer Society estimates that about 12,800 cases of
invasive cervical cancer will be diagnosed annually in the United States, with
4,600 deaths predicted annually. According to published data, cervical cancer
results in about 190,000 deaths annually worldwide, with 371,000 new cases
reported each year.
We believe the major market opportunities related to cervical cancer
are in screening and diagnosis. Since the introduction of better screening and
diagnostic methods, the number of cervical cancer deaths in the U.S. has
declined dramatically, due mainly to the increased use of the Pap smear
screening test. However the Pap smear screening test has a wide variation in
sensitivity, or the ability to detect the disease (11% to 99%), and specificity,
or the ability to exclude false positives (14% to 97%), according to an analysis
of Pap test accuracy published in the American Journal of Epidemiology, Vol.
141, No. 7, 1995. About 55 million Pap tests are given annually in the U.S. The
average price of a Pap test in the U.S. is $26. New technologies improving the
sensitivity and specificity of Pap smear screening have recently been introduced
and are finding acceptance in the market place.
After screening for cervical cancer by use of a Pap smear, if
necessary, a visual examination of the cervix using a colposcope is followed by
a biopsy. This method looks for visual changes attributable to cancer. There are
about two million colposcope examinations annually in the U.S. and Europe. The
average cost of a colposcope examination in the U.S. is $185.
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Our Non-invasive Cervical Cancer Product
In collaboration with Welch Allyn, we are developing a non-invasive
cervical cancer detection product. The product is based on our proprietary
biophotonic technology. The intended design is expected to identify cancers and
precancers painlessly, non-invasively and at the point of care by shining light
onto the cervix, then analyzing the light reflected or emanating from the
cervix. The information presented by the reflected light will be used to produce
a map or image of diseased tissue. This test, unlike the Pap smear test or
biopsy, preserves the perspective and positional information of disease on the
cervix, allowing for more accurate diagnosis. Our product, in addition to
detecting the structural changes attributed to cancer, is also expected to
detect the biochemical changes that precede the development of visual lesions.
In this way, the cancer may be detected earlier in its development, which should
increase the chances of effective treatment. The product is expected to
incorporate a disposable single-use calibration and alignment component.
During 2000, we conducted human clinical feasibility studies of
laboratory prototypes at two U.S. research centers, detecting 31% more cervical
precancerous lesions than conventional Pap tests. The results were presented at
the World Health Organization/European Research Organization on Genital
Infection and Neoplasia Joint Experts Conference in Paris in April 2000. The
study population consisted of 133 women scheduled for colposcopy and biopsy, if
indicated. A total of 318 tissue specific comparisons were made between our
device and colposcopy/biopsy results. Of the 318 cases, there were 20 high-grade
precancers, 36 low-grade precancers, 146 benign lesions, and 116 normal tissues.
Compared to the Pap test, our product detected 31% more precancers and 25% more
high-grade precancers without increasing the false positive rate.
We expect prototype development to be followed by pivotal clinical
trials and a regulatory submission. Unexpected problems, however, may arise
during the development and regulatory approval processes. In addition, we and
Welch Allyn will jointly seek regulatory approvals for our cervical cancer
detection product. Welch Allyn retains a significant degree of discretion
regarding the timing of these activities for which it has responsibility and the
amount and quality of financial, personnel and other resources that it devotes
to these activities. Accordingly, we cannot be sure that these events will
occur.
DIABETES
Background
Diabetes is a major health care problem and, according to recent
estimates by the World Health Organization, the number of people with diabetes
will grow from 140 million people worldwide to 300 million over the next 25
years. If undiagnosed or untreated, diabetes can lead to severe medical
complications over time, including blindness, loss of kidney function, nerve
degeneration, and cardiovascular disease. Diabetes is the sixth leading cause of
death by disease in the United States and is estimated to cost the American
economy over $130 billion annually, including indirect costs such as lost
productivity.
Diabetes occurs when the body does not produce sufficient levels of, or
cannot effectively use, insulin, a hormone that regulates the body's use of
glucose. Glucose levels in the blood must be within a specific concentration
range to ensure proper health. Insulin deficiency results in an abnormally high
blood glucose concentration, which causes detectable changes in some proteins
throughout the body, impairs the ability of cells to intake glucose and has
other adverse effects. There are two types of diabetes. Type I diabetes is
generally characterized as juvenile-onset and results in insulin dependency. In
Type I diabetes, which affects from 5% to 10% of all people with diagnosed
diabetes, the cells that make insulin have been damaged or destroyed. Type I
diabetes is treated with daily insulin injections. Type II diabetes is the more
prevalent form of diabetes and is generally characterized as adult-onset; it
does not necessarily result in insulin dependency. In Type II diabetes, the
insulin producing cells are unable to produce enough insulin to compensate for
the patient's poor sensitivity to the hormone in glucose-using tissues such as
skeletal muscle; a condition called insulin resistance. Type II diabetes is
initially managed with proper diet, exercise and oral medication.
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The Glucose Monitoring Market
People with diabetes have difficulty achieving optimal glucose
control. For proper glucose control, each insulin injection or other form of
medication should be adjusted to reflect the person's current blood glucose
concentration, carbohydrate consumption, exercise pattern, stress or other
health factors. Accordingly, personal glucose monitoring products have become
critical in managing diabetes by allowing people with diabetes to measure their
glucose levels in order to adjust their diet, exercise and use of oral
medication or insulin.
In June 1993, the National Institutes of Health announced the results
of the Diabetes Control and Complications Trial. This long-term study of about
1,400 people with Type I diabetes confirmed the importance of glucose control as
a determinant of long-term risk of degenerative complications. The data from the
trial demonstrated that the risk of degenerative complications is significantly
reduced if blood glucose concentrations in people with Type I diabetes can be
brought closer to the concentrations measured in non-diabetic individuals. For
example, the trial demonstrated that the risk of complications of diabetic
retinopathy, the leading cause of blindness in the United States, could be
reduced up to 76% through proper glucose control. The trial panel recommended
that people with Type I diabetes measure their blood glucose four times per day
in order to maintain proper control over their glucose levels. Although the
study involved people with Type I diabetes only, similar Japanese and United
Kingdom studies on people with Type II diabetes support the conclusion of the
Diabetes Control and Complications Trial that maintaining low average glucose
levels reduces the risks of complications associated with diabetes.
Because glucose monitoring is an important part of every day life for
people diagnosed with diabetes, the world-wide personal glucose monitoring
market is substantial. Abbott and we believe that the worldwide market for
glucose monitoring products at manufacturers' price levels is about $3.7 billion
annually and is growing at about 12%-18% per year. We believe that the market
for personal glucose monitoring products is driven by four main factors:
- an aging population;
- the realization that tight glucose control dramatically
reduces the risk of complications;
- the availability of third-party reimbursement in developed
nations; and
- the promotion and increased availability of glucose monitoring
products.
It is estimated that people with diabetes currently monitor their
glucose on average less than twice a day, instead of four times a day as
recommended by the Diabetes Control and Complications Trial. We believe that the
pain, inconvenience and cost associated with conventional finger stick blood
glucose monitoring systems are the primary reasons that most people with
diabetes fail to comply with this recommendation. We believe that greater
awareness of the benefit of frequent self-monitoring and the availability of
less painful, more convenient monitoring products could significantly increase
the global market.
Most commercially available glucose monitoring systems are painful and
inconvenient. All of these systems require that a blood sample be obtained from
a patient, applied to a disposable test strip and then measured for glucose
concentrations using a battery-powered, handheld monitor. Under most of these
systems, the blood sample is usually obtained from a patient's fingertip because
of the high concentration of capillaries at this site and because the blood
produced at the fingertip can most easily be applied directly to test strips
used in these devices. These systems typically require the patient to complete
the following steps: insert the disposable test strip into the meter, lance the
body part, apply the drop of blood to the test strip and wait for the meter to
display the results. Because nerve endings are concentrated in the fingertips,
the sampling process used in most systems can be painful. The level of patient
discomfort is compounded by the fact that the fingertips offer a limited surface
area from which to obtain a blood sample. Thus, the patient can be required to
repeatedly sample from the same site, eventually resulting in callouses. In
addition, applying the drop of blood to the test strip is difficult for those
people with diabetes who have lost dexterity in their extremities due to nerve
degeneration.
Glucose monitoring products have evolved rapidly over time. The
largest portion of this market is in conventional finger stick products. There
are also blood glucose monitoring products now on the market that are designed
to draw blood from the arm or leg, called alternate site products. Also
emerging, though not in significant commercial quantities, are continuous
glucose monitoring products, which may reduce the need for finger sticks to draw
blood. Various factors have allowed new entrants to establish market share in
the glucose monitoring product market, including technological advances, broader
product distribution and increased patient awareness of product innovations.
These factors have also expanded the overall size of the market for glucose
monitoring products.
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Our Glucose Monitoring Products
We are developing glucose monitoring products that will allow people
with diabetes to easily and accurately measure their glucose levels. These
products use our proprietary interstitial fluid sampling technology.
Interstitial fluid is an extracellular fluid that is prevalent throughout the
body just beneath the skin. Interstitial fluid is the means by which proteins
and chemicals, including glucose, pass between capillaries and cells. Studies
based on our research, as well as independent research, have shown that
interstitial fluid glucose levels correlate closely with blood glucose levels.
We believe that using interstitial fluid to measure glucose levels is more
efficient than using blood because it is free of interferences such as red blood
cells, which must often be separated from the plasma before it can be measured.
We create micropores by directing a laser on the outer layer of the skin. We
believe the creation of micropores will not damage adjacent tissue or penetrate
deeply enough to reach the capillary bed or nerve layer below the outer layer of
skin. Our glucose monitoring products use our microporation technology to
collect a sample of interstitial fluid. This interstitial fluid sample may be
measured once in a single-use application, or a stream of interstitial fluid may
be repeatedly measured for a continuous monitoring application. Products using
both sampling methodologies are intended to measure the glucose concentration of
the interstitial fluid using disposable technology. Because our glucose
monitoring products are designed to obtain a sample of interstitial fluid
through the outermost layers of the skin and do not require a blood sample,
their use does not significantly stimulate pain sensors and capillaries found in
the deeper layers of skin. These products are expected to be free of the pain
and blood involved in conventional finger stick or alternate site techniques.
We initially focused our research efforts in the area of single-use
glucose monitoring, in collaboration with Abbott. Since the fall of 1998, we
have focused our research efforts on applications in the continuous monitoring
area. In November 1999, we amended our agreement with Abbott to include
continuous monitoring products. The primary focus of our collaboration is
currently on the continuous monitoring product, with a lesser amount of research
by Abbott into the single-use application.
Continuous Glucose Monitoring Product
During the course of research and development of our single-use
glucose monitoring product, we discovered a technique in 1998 which allows for
continuous monitoring of glucose. By applying a constant state of low-level
vacuum to an array of micropores, a stream of interstitial fluid is produced.
This stream of interstitial fluid may be passed over a sensor which measures the
glucose concentration, periodically providing the patient with readings.
Feasibility data we generated in 1998 indicates that an array of micropores may
be kept viable for up to three days. A second feasibility study showed that the
concentration of glucose in the interstitial fluid continued to correlate to the
concentration of glucose in the blood during a three day period.
The product concept of the continuous glucose monitoring product
consists of a disposable patch electronically connected to a small meter. The
patch would be placed over an array of four micropores created on the surface of
the skin. This array could be placed in a number of locations, but the current
concept would have it placed on the torso. The patch would be designed to
eliminate spent interstitial fluid. The meter would be worn on a belt or hidden
under clothing. The system would automatically collect a new glucose reading
periodically, which would be recorded by the meter and presented on its display
unit. The stored information could be downloaded for analysis. The meter could
also indicate if the current reading is higher or lower than any previous
reading, showing a trend. The meter would also be capable of giving an alarm for
high or low glucose levels. For convenience, the umbilical would be detachable
so that the patient may bathe or engage in other activities, then reattach the
umbilical and resume monitoring the stream of interstitial fluid.
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In November 1999, Abbott and we entered into an amendment of the
collaborative arrangement we originally entered into in 1996. The primary focus
of the amendment was to include the continuous glucose monitoring research,
development and commercialization effort with our agreement. It also included
potential manufacturing by us and other potential collaborations with Abbott. In
addition, we issued redeemable, convertible preferred stock to Abbott for
$5,250,000 in connection with the signing of the amendment.
In April 2000, we announced that Abbott paid us a $500,000 milestone
payment for progress in the continuous glucose monitoring development program.
In June 2000, we presented data at the American Diabetes Association
meeting showing that our glucose monitoring prototypes were capable of
continuously measuring glucose in people with diabetes over an extended time
with a correlation to finger stick blood measurements of about 90%. The research
matched 1,001 data pairs in three separate clinical studies.
In October 2000, we announced receipt of a grant of $307,000 from the
U.S. Centers for Disease Control and Prevention. We have now received more than
$600,000 in funding to adapt our glucose monitoring technology to monitor blood
sugar levels of children and elderly people with diabetes.
In December 2000, we received a $2,000,000 milestone payment from
Abbott for development of a continuous glucose monitoring device for people with
diabetes. The milestone payment was related to establishing feasibility of our
continuous glucose monitoring technology.
Our research and development is focused on the integration of our
microporation technology, fluid management and the glucose assay technology into
a product. We expect product development to be followed by clinical trials and a
regulatory submission. Under our collaborative arrangement with Abbott, we are
jointly responsible for research for the continuous glucose monitoring product.
If Abbott wishes to commercialize the product, then they will be responsible for
further product development and obtaining all regulatory approvals. Unexpected
problems, however, may arise during the development and regulatory approval
processes. In addition, Abbott retains a significant degree of discretion
regarding the timing of these activities for which it has responsibility and the
amount and quality of financial, personnel and other resources that it devotes
to these activities. Accordingly, we cannot be sure that these events will
occur.
Single-use Glucose Monitoring Product
Our single-use glucose monitoring product is expected to be comprised
of a small, hand held battery-powered, monitoring device and a proprietary,
disposable cartridge. The monitoring device will be placed on the skin, and a
laser or other suitable energy source mounted in the housing will be used to
create micropores. We anticipate that the device will have a proprietary
mechanism that will cause the interstitial fluid to flow out of the micropores
and into the disposable cartridge. When the cartridge is full and the
interstitial fluid has been analyzed, the results will appear on a display.
In January 1996, we undertook a pilot study of 10 people, six of whom
had diabetes and four of whom did not. This study was performed under a protocol
reviewed and approved by the Georgia Baptist Medical Center. The study was
designed to evaluate the correlation between results obtained using early stage
prototypes of our glucose monitoring product and a leading conventional personal
blood glucose monitoring system. The study compared the glucose levels in
interstitial fluid and blood of the 10 people, who were each administered 75
grams of glucose. The study, which yielded a total of 876 glucose measurements,
including 438 contemporaneous measurements of interstitial fluid and blood,
produced a correlation coefficient of 0.96 between glucose levels in
interstitial fluid and blood.
In October 1996, we entered into a collaborative arrangement with
Abbott for the development and commercialization of our glucose monitoring
products. We granted Abbott an exclusive worldwide license for our single-use
glucose monitoring product and other related glucose monitoring devices in all
countries except Singapore and the Netherlands, where the license is
non-exclusive. As part of the agreement, Abbott agreed to pay all costs
associated with a joint research and development program, to make specified
milestone payments to us and to pay us a royalty based on net sales. Abbott was
also to be responsible for conducting clinical trials, obtaining regulatory
approval and manufacturing, marketing, distributing, and selling the products
covered by the arrangement. In addition, we issued 500,000 shares of series C
preferred stock in 1996 to Abbott, which converted into 357,143 shares of common
stock upon our initial public offering. As mentioned above, this agreement was
amended in November 1999.
We conducted research on the single-use glucose monitoring product
through the third quarter of 1998, when that research work was transferred to
Abbott when it was determined that significant additional research would be
required to reach feasibility. Abbott is currently responsible for the research
program for single-use glucose monitoring. The focus of that research will be to
produce methodologies that will permit collection of interstitial fluid at a
minimum volume level, and within a specified time, on a universal basis within
the target diabetic population. Abbott retains a significant degree of
discretion regarding the timing of these activities for which it has
responsibility and the amount and quality of financial, personnel and other
resources that it devotes to these activities. Accordingly, we cannot be sure
that these events will occur.
The Diabetes Detection Market
The American Diabetes Association estimates that about 15.7 million
people in the United States have diabetes, but only about 10.3 million have been
diagnosed with the disease. The long term health care costs of a person with
diabetes can be substantially reduced if the patient can be diagnosed in the
early stages of the disease. Early diagnosis allows glucose levels to be
monitored and properly controlled, which can reduce complications that result
from long term exposure to elevated glucose levels. The American Diabetes
Association currently recommends screening for all adults over 45 years old
every three years. Currently, about 798,000 new cases of diabetes are diagnosed
each year in the United States, and many of those diagnosed have complications
that generally appear eight to ten years after onset of the disease. We believe
that the low rate of diabetes diagnosis and the failure in many cases to
diagnose the disease before the onset of complications is due primarily to the
lack of a convenient and accurate diabetes detection test.
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There are several diabetes detection tests in use today. The diabetes
detection procedure recommended by the American Diabetes Association is the
blood-based fasting plasma glucose test. This test may be considered difficult
and inconvenient to administer because it requires the patient to fast for eight
hours before blood is drawn. Additionally, the blood sample is usually sent to a
laboratory for analysis, which delays the receipt by the patient of the test
results.
Our Non-Invasive Diabetes Detection Product
The non-invasive diabetes detection product we are developing with
Roche, trademarked the Accu-Chek D-Tector, is designed to detect and measure
fluorescence in the lens of the eye and evaluate that measurement using our
proprietary algorithm. An abnormally high level of fluorescence in the lens of
the eye may be indicative of prolonged exposure to high levels of glucose due to
diabetes. A measurement indicating a patient is likely to have diabetes could be
confirmed by subsequent testing using conventional blood-based diagnostics. The
performance of the diabetes detection product has been shown to be comparable to
that of the blood-based screening test. Unlike the blood based tests, however,
our diabetes detection product is painless, would provide the patient with test
results in less than a minute at the point of care, and would not require the
patient to fast for eight hours before the test. Roche has named the product the
Accu-Chek D-Tector after its leading brand of blood glucose testing products,
trademarked under the name Accu-Chek.
The Accu-Chek D-Tector product is designed to be simple and painless
to use and to produce accurate point-of-care results in a very short period of
time. We believe that such a method of diabetes detection is likely to become as
prevalent as glaucoma testing, which is regularly performed during eye exams.
Therefore, we believe that this product may result in increased diagnoses of the
millions of undiagnosed people with diabetes worldwide, of which about 5.4
million live in the United States. For this reason, we believe that our
non-invasive diabetes detection product presents a substantial opportunity to
identify new patients who can benefit from proper treatment, which should reduce
incidences of complications and their associated cost.
The Accu-Chek D-Tector is designed as a compact instrument that will
meet desk-top space limitations of optometrists' and physicians' offices and
will also be suitable for retail establishments such as pharmacies. To use the
device, the patient looks into the instrument while placing their head against a
rest. The patient is instructed to look at a fixed light as the instrument
locates the eye and automatically tracks the pupil opening. The device measures
fluorescence in the lens of the eye using a low-intensity blue light. The
results of the analysis will indicate either that the patient should undergo
further diagnostic testing or that there is no indication of diabetes. In a
pilot study conducted by Roche of more than 1,300 patients, including both
diabetics and non-diabetics, an early stage prototype of our diabetes detection
product demonstrated an ability to detect diabetes.
Roche is in the process of conducting FDA clinical trials in
anticipation of an expedited review for its premarket approval application for
the Accu-Chek D-Tector. In December 1998, Roche filed a 510(k) premarket
notification submission with the FDA on behalf of our non-invasive diabetes
detection product. That application was withdrawn in June 1999, and Roche
reported that the FDA required a premarket approval process for the device. In
August 2000, we reported that Roche had reached an agreement with the FDA
granting the Accu-Chek D-Tector expedited review status for a modular premarket
approval. In March and April 2000, we delivered to Roche 30 Accu-Chek D-Tector
units for use during clinical trials. In late 2000, Roche began conducting
clinical trials to support the application for premarket approval. We cannot be
sure when Roche will have enough data from these trials to support its
application for premarket approval.
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We entered into a collaboration agreement with Roche, and as a result
we have granted Roche an exclusive worldwide license to sell and market our
non-invasive diabetes detection product. We received development milestone
payments and are entitled to a manufacturing profit on products sold to Roche.
In 2000, we received $124,000 in development milestones and $225,000 in product
revenue from Roche. Roche is responsible for conducting clinical testing,
obtaining regulatory approvals, and marketing, distribution and sales of the
Accu-Chek D-Tector. Roche retains a significant degree of discretion regarding
the timing of these activities for which it has responsibility and the amount
and quality of financial, personnel and other resources that it devotes to these
activities. Accordingly, we cannot be sure that these events will occur.
COLLABORATIVE ARRANGEMENTS
Our business strategy for the development and commercialization of our
products depends, to a significant degree, on our ability to enter into and
maintain collaborative arrangements with leading medical device companies. We
currently have collaborative arrangements with Abbott, Roche, Respironics and
Welch Allyn. We are, to varying degrees, dependent upon our collaborative
partners for funding or providing the development, clinical testing, regulatory
approval, manufacturing, and commercialization of our products.
Respironics
In June 1996, we entered into a Purchasing and Licensing Agreement with
Healthdyne Technologies, Inc., which was later acquired by Respironics. This
agreement was amended in October 1998. Under this agreement, Respironics is
responsible for clinical trials, the regulatory approval process and sale of the
BiliChek in the United States and Canada. We retain manufacturing rights and are
responsible for the regulatory approval process and sale of the BiliCheck
outside of the United States and Canada. Under our agreement with Respironics,
Respironics pays us licensing fees, and we are entitled to a manufacturing
profit on products sold to Respironics and to share any profit from the sales of
disposables by Respironics. Respironics has an exclusive license for the United
States and Canada:
- to use and sell instruments for non-invasive bilirubin
measurement;
- to use and sell disposable probes, tips or other devices
which, when used with instruments, measure bilirubin levels;
- to use and sell items accessory to and not necessary for the
operation of instruments or disposables; and
- to make instruments, disposables and accessories under
specified circumstances.
Respironics must purchase its requirements for licensed products from
us, unless we are unable to supply these licensed products. We sell the BiliChek
product to Respironics at a negotiated price, subject to renegotiation if our or
Respironics' gross margins fall outside of a pre-determined range. Respironics
has agreed to pay our cost for manufacturing for the BiliCal product, and we
then share equally the margin earned on the sale of the BiliCal product. In
order to maintain license exclusivity, Respironics has agreed to purchase from
us specified minimum amounts of licensed products or pay us a royalty for an
equivalent number of licensed products. If we are unable to supply licensed
products, Respironics will receive a license to manufacture these products and
will pay us a royalty on sales of these products.
We have granted to Respironics the exclusive option to acquire an
exclusive license for the United States and Canada, on terms substantially
similar to those contained in the agreement with Respironics, for specified new
intellectual property that comes into existence after the effective date of the
agreement. This covers devices that would compete, directly or indirectly, with
the licensed products and for which we have the right and authority to grant
licenses. In this event, Respironics has agreed to reimburse us for one-half of
our cost to develop and commercialize the product, rather than paying any
license fees. If Respironics fails to exercise the option, we may license the
intellectual property to any third party on terms no more favorable than those
offered to Respironics.
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The agreement with Respironics remains in effect for the longer of 15
years or until the expiration date of the last licensed patent to expire. Upon
expiration of the agreement, Respironics has the option to renew the agreement
for additional 15 year terms indefinitely. Respironics also has the right to
terminate the agreement without cause upon not less than 30 days' written notice
to us.
Welch Allyn
In December 1998, we entered into a Development and Commercialization
Agreement with Welch Allyn, Inc. for noninvasive cervical and skin cancer
diagnostic products. Under the terms of the agreement, we jointly share in the
development costs for the products and also will jointly share in the revenue
produced by the products, if those products are developed to commercialization.
We can also receive milestone payments under the agreement. The agreement
anticipates that both Welch Allyn and we would manufacture portions of any
commercialized products and would collaborate in sales and marketing. Both we
and Welch Allyn are prohibited from pursuing development of devices utilizing
the technology covered by the agreement with another party while the
collaboration remains in effect. The agreement specifically focuses on the
development of a cervical cancer detection product. Should we determine through
research efforts that an application of the technology for the detection of skin
cancer is feasible, the agreement provides for, and retains rights for Welch
Allyn to expand the relationship with us, to develop and commercialize a skin
cancer detection product. In December 1999, we completed the requirements for
the feasibility phase, which triggered a milestone payment of $700,000. There
were no milestone payments earned in 2000.
Abbott Laboratories
In October 1996, we entered into a research development and license
agreement with Abbott for the development and commercialization of our glucose
monitoring technology in the field of extracting interstitial fluid samples for
glucose monitoring. In November 1999, we and Abbott entered into an amendment of
the research development and license agreement to include specific terms related
to the continuous monitoring program. Under this agreement, we have granted to
Abbott a worldwide license under our patents, patent applications and know how
useful in the field, including improvements, to manufacture and sell these kinds
of products. The license is exclusive in all countries except Singapore and the
Netherlands, where the license is non-exclusive. Abbott also has rights of first
negotiation with us regarding any rights we may have to license the technology
for the development and commercialization of other products relating to the
measurement of analytes in interstitial fluid and the delivery of therapeutic
agents based on those measurements. Under the agreement with Abbott, we receive
from Abbott development funding, payments on achievement of milestones and a
royalty on Abbott's product sales.
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As part of the first agreement, Abbott made a $3 million equity
investment in us in 1996 by purchasing 500,000 shares of series C preferred
stock, which converted into 357,143 shares of common stock at our initial public
offering. Abbott later purchased our common stock in the open market and
currently owns 5.9% of our outstanding stock. In connection with the November
1999 amendment, Abbott purchased $5.25 million of redeemable, convertible
preferred stock from us, which is convertible into our common stock. Because
these shares are redeemable, they are classified as debt on our balance sheet.
If the preferred stock is tendered for conversion, we may redeem the shares, at
our option. If the preferred stock is converted, the conversion price is to be
set at the market price at the date of conversion, or at $9.388 per share,
whichever is higher. If the stock were to convert at $9.388 per share, Abbott
would own 12.1% of our outstanding stock, based upon shares outstanding on
December 31, 2000.
Under the agreement with Abbott, we and Abbott agreed to jointly
conduct a research program designed to demonstrate that our single-use glucose
monitoring product can extract an adequate sample of interstitial fluid in a
targeted time period. The focus of that development activity through August 1998
was toward a single-use product concept. During the joint development program,
which began in the fourth quarter of 1996, Abbott paid mutually agreed
development costs. Abbott currently is responsible for all research on means of
extracting adequate samples of interstitial fluid related to single-use glucose
monitoring applications. Our current focus of research and development activity
is on the continuous monitoring application. After satisfactory demonstration of
sample extraction and measurement of glucose in interstitial fluid using the
continuous process, and if Abbott wishes to commercialize the product, it is
responsible for further product development and obtaining all required
regulatory approvals. After obtaining these regulatory approvals, Abbott is
required to diligently pursue the sales of the products but is not prohibited
from marketing competing products. If Abbott elects not to commercialize the
product, the agreement may be terminated by either party. Abbott has a fixed
period from the date of notice to us of their intention to commercialize the
product in which to complete commercialization and begin shipment of products.
If commercialization has not been completed within the permitted time, we may
terminate the agreement.
Under the agreement with Abbott, all technology invented solely by us
during the joint development program is owned solely by us. All technology
invented solely by Abbott and all clinical data, regulatory filings and
government marketing approvals developed solely by Abbott are the property of
Abbott. On specified early termination events, we have a right to obtain a
license to some of the relevant Abbott technology. Technology jointly invented
during the joint development program will be jointly owned under a royalty
sharing arrangement.
The agreement remains in effect until the expiration of the last
licensed patent to expire. Abbott has the right to terminate the agreement
without cause upon not less than 60 days' prior notice to us at any time before
the first shipment of products and upon not less than 120 days' prior notice to
us after the first shipment. Abbott may terminate the agreement upon not less
than 30 days' prior notice to us for specified product development failures.
Roche Diagnostics
In December 1994, we entered into a Development and License Agreement
with Boehringer Mannheim Corp., which has since merged with Roche, for a
non-invasive instrument that measures changes in the lens of the human eye for
the purpose of detecting diabetes. The agreement was replaced by a new
Development and License Agreement between us and Roche in June 1999. Under this
agreement, we have granted to Roche an exclusive, worldwide license to sell and
market our diabetes detection product, and we have received development
milestone payments from Roche. The agreement remains exclusive for so long as
Roche meets specified minimum volume purchase requirements. Roche must obtain
clearance to sell the product in the United States from the FDA. This agreement
may be terminated at any time by Roche upon written notice to us.
In January 1996, we entered into a supply agreement with Roche for our
diabetes detection product. This agreement was also replaced by a new supply
agreement in June 1999. Roche's purchase price for our diabetes detection
product is calculated according to a formula based on a gross margin. Roche is
required to meet minimum annual purchase requirements for the diabetes detection
product each year or it forfeits its exclusivity under the marketing license
granted in the development agreement. The term of the supply agreement is
coincident with the term of the development agreement. Roche may terminate the
supply agreement for our material breach, including a failure to supply adequate
requirements, which breach remains unremedied for 30 days after notice to us. If
this occurs, Roche is deemed to have acquired a manufacturing license under the
development agreement. If Roche acquires this manufacturing license, they must
pay royalties to us on sales of the diabetes detection product, and we would
retain the right to reacquire the manufacturing license. During the term of the
supply agreement, we cannot enter into any agreement to develop or manufacture a
non-invasive diabetes detection instrument using the same or similar technology
as used in our diabetes detection product, other than with Roche's
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affiliates. Roche is not restricted from pursuing the development of a diabetes
detection instrument with another party.
LICENSING ARRANGEMENTS
Georgia Tech Research Corporation
We have a license agreement with Georgia Tech Research Corporation.
Under this agreement entered into in May 1991, as amended, Georgia Tech Research
has granted us an exclusive, worldwide license, including the right to grant
sublicenses, to make, use and sell products that incorporate its know how
related to a method of using non-invasive instrumentation to quantitatively
measure molecular changes in living human lenses for the purposes of diagnosing
diabetes and precataractous conditions. Under the license, we must pay a royalty
to Georgia Tech Research on net sales of any products manufactured and sold by
us. The term of this agreement is until the expiration date of the last expiring
patent covering any of the technology licensed or, if no patent issues, for 15
years from the date of execution of the agreement.
Altea Technologies, Inc.
In March 1996, we entered into a license and joint development
agreement among us, Altea and Non-Invasive Monitoring Company, Inc. Under this
agreement, specified rights in respect of jointly developed technology are
allocated between us and Altea. Both Altea and Non-Invasive Monitoring are
jointly controlled by Jonathan Eppstein, formerly our vice president, and his
sister. This agreement also covers one granted patent and know-how related to
our glucose monitoring product, the joint application by us and Altea for a U.S.
patent and an international patent related to the glucose monitoring product. It
also provides for continued joint development efforts between us and Altea, as
mutually agreed. The agreement further provides for the joint ownership by us
and Altea of some patents and technology relating to the transdermal/intradermal
movement of substances using various methods. Under this agreement, we receive
worldwide, exclusive rights to any technology for monitoring applications
covered by the Non-Invasive Monitoring patents and related joint technology, and
Altea receives exclusive, worldwide rights to any technology for delivery
applications covered by the joint technology. Future inventions in some areas
made by us or Altea based on newly developed technology related to the licensed
technology could be included within the agreement.
We are obligated to pay royalties to Non-Invasive Monitoring for
products using its technology and to Altea for products using its technology, in
each case based on net sales of products and net revenues from sublicensees.
Royalties on products using technology of both companies will be allocated as
mutually agreed. Minimum annual royalties are payable by us to Altea. See note 8
of the notes to consolidated financial statements. If actual accrued royalties
are less than the minimum royalty amount, we must pay Altea the difference or
the license will become non-exclusive. Thereafter, we must offer a right of
first refusal to acquire exclusive rights to the monitoring technology to Altea.
The term of the agreement is for the life of the patents covered by the
agreement. The agreement may be terminated by any party in the event of a
default by any other party that is not cured within 90 days of notice to the
defaulting party. The agreement may be terminated globally by Altea if we fail
to commercialize any product, use or application using the monitoring technology
in any major country by the date of the first commercial shipment date under our
agreement with Abbott. In addition, we may delay the deadline for
commercialization if there is a major new invention related to the technology.
It may also be terminated by Altea with respect to specified regions if we fail
to commercialize any product, use or application in those regions by this date.
We may terminate the agreement upon not less than three months prior notice to
Altea and Non-Invasive Monitoring if given before it has commercialized the
technology and upon not less than six months prior notice to each party if given
after commercialization has begun. Except in the case of termination of the
agreement by us for breach, upon termination all technology and joint technology
becomes the exclusive property of Altea, except the Non-Invasive Monitoring
patents. If the agreement is terminated by us for breach, all rights to the
monitoring technology in the countries in which we have retained our exclusive
rights become our exclusive property, each party retains non-exclusive rights to
the monitoring technology in other countries, and Altea retains all rights to
the delivery technology. If we lose our rights to the monitoring technology for
failure to commercialize but not due to breach, Altea and Non-Invasive
Monitoring, after their reacquisition of rights from us, will pay a royalty to
us according to a formula to reflect each party's relative investment. We and
Altea and Non-Invasive Monitoring have arbitrated specified claims under these
agreements as discussed in "Item 3. Legal Proceedings."
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The University of Texas M.D. Anderson Cancer Center
In March 1996, we entered into a patent license agreement with the
Board of Regents of the University of Texas System and M.D. Anderson Cancer
Center. Under this agreement, we have an exclusive license to some of M.D.
Anderson's patents to manufacture, have manufactured, use and sell products
within the United States for use in optical measurement of bilirubin in human
tissue. We have the right to assign this license to affiliates and the right to
sublicense these rights. In connection with the patent license agreement, we
have agreed to pay all expenses incurred in prosecuting and maintaining the
patents licensed and a royalty on net sales of products that incorporate the
licensed patents, subject to annual minimum royalty payments. See note 8 of
notes to consolidated financial statements. The term of the patent license
agreement is until the expiration date of the last expiring patent licensed. The
Board of Regents has the right at any time after one year from the effective
date of the patent license agreement to terminate the license if we, within 90
days after written notice, fail to provide written evidence satisfactory to the
Board of Regents that we have commercialized or are actively and effectively
attempting to commercialize an invention licensed under the patent license
agreement.
Joseph Lakowicz, Ph.D.
We have a license agreement with Joseph Lakowicz, Ph.D. Under this
agreement, Dr. Lakowicz has granted us an exclusive, worldwide license,
including the right to grant sublicenses, to make, use, and sell medical
products that incorporate Dr. Lakowicz's intellectual property related to
lifetime fluorescence technology. The intellectual property consists of a
portfolio of granted patents, patent applications and foreign filings in the
area of lifetime fluorescence technology. We have agreed to pay a royalty to Dr.
Lakowicz on net sales of these products manufactured and sold. We are obligated
to pay specified minimum royalty payments to Dr. Lakowicz. See note 8 of the
notes to consolidated financial statements. We have sublicensed some parts of
this intellectual property related to invasive blood tests to our affiliate,
FluorRx, Inc. The term of this agreement is until the expiration date of the
last expiring patent covering any of the technology licensed.
RESEARCH, DEVELOPMENT AND ENGINEERING
To date, we have been engaged primarily in the research, development
and testing of our glucose monitoring, diabetes detection, infant jaundice and
cancer detection products, including research for and development of our core
biophotonic technologies. Since inception to December 31, 2001, we incurred
about $23.4 million in research and development expenses, net of about $6.5
million, which was reimbursed through collaborative arrangements. Research and
development costs were about $4.2 million in 1998, $5.2 million in 1999, and
$5.8 million in 2000. Three distinct groups conduct research, development and
engineering. One group consists of 21 engineers and support personnel who design
optics, electronics, mechanical components and software for the infant jaundice,
diabetes detection, continuous glucose monitoring and non-invasive cervical
cancer detection products. A second group consists of 36 scientists and
engineers who devote their time to the development of microporation technology
for the monitoring of glucose and other compounds. The third group consists of
19 scientists and engineers focused on the development of cancer detection
products.
We believe that the interstitial fluid sampling technology we have
under development with Abbott for use in connection with our glucose monitoring
products may also be used to develop alternatives for some blood tests where the
analyte being tested is also present in comparable volumes in interstitial
fluid. Abbott has a right of first negotiation with us regarding the use of
interstitial fluid sampling technology for these applications.
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In 1996, we executed a licensing agreement with Dr. Lakowicz of the
University of Maryland under which we license a portfolio of intellectual
property related to lifetime fluorescence technology, a technology used to
determine the spectroscopic fingerprint of a substance. We believe lifetime
fluorescence technology may have applications including in vitro blood
chemistry, molecular diagnostics, flow cytometry, combinatorial chemistry for
pharmaceutical discovery research and noninvasive optical diagnostics. All
activity related to this technology is being conducted by our affiliate,
FluorRx.
To date, we have only tested prototypes of our glucose monitoring and
cancer products. Because our 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 our glucose monitoring
and cancer detection products are produced. We have developed the pre-production
prototypes of the diabetes detection device that are currently being used by
Roche for clinical testing. While significant progress has been made in
development and engineering, considerable additional effort and expense will be
required before a commercial device is shipped.
MANUFACTURING
We plan to manufacture some of our products and to outsource the
production of other, high volume products and associated disposables. To date,
our manufacturing activities have consisted of building prototype devices,
developing production infrastructure and building production versions of our
BiliChek and BiliCal products. If we successfully develop our diabetes detection
product and, together with Roche, obtain FDA clearance and other regulatory
approvals to market this product, we will undertake to manufacture both of these
products in commercial quantities. We have little experience manufacturing
products in the volumes that would be necessary for us to achieve significant
commercial sales. Currently, we employ 18 individuals to accomplish the
production planning, quality system management, facility development, and
production scaling that will be needed to bring production to commercial levels.
In 1998, we announced that we had received ISO 9001/EN46001 and CE mark
certification. These approvals enabled us to begin production of our BiliCheck
and BiliCal products and to begin shipment of these products into markets for
which we have received regulatory clearance.
SALES, MARKETING AND DISTRIBUTION
We have elected to focus most of the sales and distribution of our
current and developing products through our collaborative partners. We believe
that by aligning with larger, more established partners in specific market
segments, we can use our partners' already developed strengths to more
effectively and quickly penetrate the market place. Our primary efforts to date
have been to build the skill and information base to identify and quantify
market segments to which our technologies can be economically developed and
marketed and to launch the BiliChek product system.
We have developed internal marketing and a distribution program for the
BiliChek and BiliCal products to an introductory stage. We have developed
packaging, advertising, display materials, and training. In addition, we have
signed distribution agreements or have entered into negotiations with companies
we believe to be highly experienced in the neonatal markets that we are
targeting in Europe, Asia and South America. We have also added or engaged
marketing personnel to develop and execute the programs necessary to launch the
BiliCheck system and to manage sales of these products. We launched our
BiliCheck product in markets outside the U.S. and Canada in April 1998 and began
introductory programs during the remainder of 1998. Nevertheless, we are still
early in this product's market introduction, and the efficacy of the marketing
programs or the distributors has not yet been fully tested with our products.
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Respironics has the exclusive right to market and sell our infant
jaundice product in the United States and Canada. Abbott has the
exclusive right to market and sell our glucose monitoring products in all
countries except Singapore and the Netherlands, where the license is
non-exclusive. Roche has the exclusive worldwide right to market and sell our
diabetes detection product. It is anticipated that Welch Allyn and we will
jointly manage the sales and marketing of any cancer detection products that are
developed.
PATENTS
We have pursued a course of developing and acquiring patents and patent
rights and licensing technology. Our success depends in large part on our
ability to establish and maintain the proprietary nature of our technology
through the patent process and to license from others patents and patent
applications necessary to develop our products. We have licensed from
Non-Invasive Monitoring one granted patent and know-how related to its glucose
monitoring product, jointly applied with Altea for a U.S. patent and an
international patent related to this device, and have licensed this granted
patent and these patent applications to Abbott under our collaborative
arrangements. We have license agreements with Georgia Tech Research Corporation
that give us the right to use two patents related to our diabetes detection
product, and we have licensed this proprietary technology to Roche under our
collaborative arrangement. We have a license agreement with M.D. Anderson that
gives us access to one patent related to our infant jaundice product, and we
have applied for two patents related to this product. We have licensed the one
patent and two patent applications to Respironics under our collaborative
arrangement with that company. In addition, we licensed from Dr. Joseph Lakowicz
several granted patents and patent applications related to fluorescence
spectroscopy that we intend to use in our research and development efforts.
One or more of the patents held directly by us or licensed by us from
third parties, including the disposable components to be used in connection with
our glucose monitoring and infant jaundice products, as well as processes used
in the manufacture of our products, may be successfully challenged, invalidated
or circumvented. Additionally, we may not otherwise be able to rely on these
patents. In addition, we cannot be sure 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 our ability to make, use and sell our products either in the
United States or in foreign markets. If any of our patents are successfully
challenged, invalidated or circumvented or our rights or ability to manufacture
our products were to be proscribed or limited, our ability to continue to
manufacture and market our products could be adversely affected, which would
likely have a material adverse effect upon our business, financial condition and
results of operations.
COMPETITION
The medical device industry in general, and the markets for glucose
monitoring and cervical cancer detection in particular, are intensely
competitive. If successful in our product development, we will compete with
other providers of personal glucose monitors, diabetes detection tests, and
infant jaundice and cancer detection products.
A number of competitors, including Johnson & Johnson, Inc. (which owns
Lifescan, Inc.), Roche, Bayer AG (which owns Miles Laboratories, Inc.) and
Abbott (which owns MediSense, Inc.) are currently marketing traditional
single-use 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 developed products for alternate site
glucose monitoring, including Amira, Johnson & Johnson, Thermasense and our
collaborative partner, Abbott. Some competitors to our continuous glucose
monitoring product, including Cygnus and MiniMed, have developed products and
have received some form of FDA clearance. Accordingly, competition in this area
is expected to increase.
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There is also competition in the diabetes detection and infant jaundice
markets. The existing blood test providers, companies that produce blood tests
and other technologies that could replace blood testing will compete for a share
of these markets.
Competition in cancer detection is also intense. Current screening
systems, primarily the Pap smear and colposcopy, are well established and
pervasive. Improvements and new technologies for cervical cancer detection, such
as Thin-Prep from Cytec and Human Papilloma Virus testing from Digene, have
introduced other new competitors. In addition, there are other companies
attempting to develop products using forms of biophotonic technologies in
cervical cancer detection. We will be required, in conjunction with Welch Allyn,
to develop devices that are more accurate, easier to use or less costly to
administer to create devices that have a competitive advantage. In addition to
existing external competitors, our partner, Welch Allyn, is currently a
competitor in the colposcopy market.
GOVERNMENT REGULATION
All of our products are or will be regulated as medical devices.
Medical device products are subject to rigorous FDA and other governmental
agency regulations in the United States and may be subject to regulations of
relevant foreign agencies. Noncompliance with applicable requirements can result
in import detentions, fines, civil penalties, injunctions, suspensions or losses
of regulatory approvals or clearances, recall or seizure of products, operating
restrictions, denial of export applications, governmental prohibitions on
entering into supply contracts, and criminal prosecution. Failure to obtain
regulatory approvals or the restriction, suspension or revocation of regulatory
approvals or clearances, as well as any other failure to comply with regulatory
requirements, would have a material adverse effect on our business, financial
condition and results of operations.
The FDA regulates the clinical testing, manufacture, labeling,
packaging, marketing, distribution and record keeping for these products to
ensure that medical products distributed in the United States are safe and
effective for their intended uses. The Clinical Chemistry Branch of the FDA's
Division of Clinical Laboratory Devices has traditionally been the reviewing
branch for blood-based personal glucose monitoring products. The Clinical
Chemistry and Clinical Toxicology Devices Panel is an external advisory panel
that provides advice to the Clinical Chemistry Branch regarding devices that it
reviews. This panel meets from time to time and provides comments on testing
guidelines. There may be new FDA policies or changes in FDA policy that are
materially adverse to us.
In the United States, medical devices are classified into one of three
classes on the basis of the controls deemed necessary by the FDA to reasonably
assure the devices' safety and effectiveness. Under FDA regulations, Class I
devices are subject to general controls, such as labeling requirements,
notification to the FDA before beginning marketing activities and adherence to
specified good manufacturing practices. Class II devices are subject to general
and special controls, such as performance standards, surveillance after
beginning market activities, patient registries, and FDA guidelines. Generally,
Class III devices are those which must receive premarket approval from the FDA
to ensure their safety and effectiveness. Examples of Class III devices include
life-sustaining, life-supporting and implantable devices, as well as new devices
which have not been found substantially equivalent to legally marketed Class I
or II devices.
A medical device manufacturer may seek clearance to market a medical
device by filing a 510(k) premarket notification with the FDA if the
manufacturer establishes that a newly developed device is substantially
equivalent to either a device that was legally marketed before May 28, 1976, the
date upon which the Medical Device Amendments of 1976 were enacted, or to a
device that is currently legally marketed and has received 510(k) premarket
clearance from the FDA. The 510(k) premarket notification must be supported by
appropriate information, which may include data from clinical trials to
establish the claim of substantial equivalence. Commercial distribution of a
device for which a 510(k) premarket notification is required can begin only
after the FDA issues an order finding the device to be substantially equivalent
to a legally marketed device. The FDA has recently been requiring a more
rigorous demonstration of substantial equivalence than in the past. It generally
takes from four to 12 months from the date of submission to obtain clearance of
a 510(k) submission, but it may take substantially longer. The FDA may determine
that a proposed device is not substantially equivalent to a legally marketed
device, or may require additional information.
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An adverse determination or a request for additional information could
delay the market introduction of new products that fall into this category,
which could have a material adverse effect on our business, financial condition
and results of operations. For any of our products that are or will be cleared
through the 510(k) process, modifications or enhancements that could
significantly affect the safety or effectiveness of the device or that
constitute a major change to the intended use of the device will require new
510(k) submissions or approval of an application for premarket approval. Any
modified device for which a new 510(k) premarket notification is required
cannot be distributed until 510(k) clearance is obtained for the modified
device. We may not be able to obtain 510(k) clearance in a timely manner, if at
all, for any devices or modifications to devices for which we may submit a
510(k) notification.
An application for premarket approval must be submitted if a proposed
device is not substantially equivalent to a legally marketed Class I or Class II
device or for specified Class III devices. The application must contain valid
scientific evidence to support the safety and effectiveness of the device, which
includes the results of clinical trials, all relevant bench tests, and
laboratory and animal studies. The application must also contain a complete
description of the device and its components, as well as a detailed description
of the methods, facilities and controls used for its manufacture, including,
where appropriate, the method of sterilization and its assurance. In addition,
the application must include proposed labeling, advertising literature and any
required training methods. If human clinical trials of a device are required in
connection with an application and the device presents a significant risk, the
sponsor of the trial is required to file an application for an investigational
device exemption before beginning human clinical trials. Usually, the
manufacturer or distributor of the device is the sponsor of the trial. The
application must be supported by data, typically including the results of animal
and laboratory testing, and a description of how the device will be
manufactured. If the application is reviewed and approved by the FDA and one or
more appropriate institutional review boards, human clinical trials may begin at
a specified number of investigational sites with a specified number of patients.
If the device presents a nonsignificant risk to the patient, a sponsor may begin
clinical trials after obtaining approval for the study by one or more
appropriate institutional review boards, but FDA approval for the commencement
of the study is not required. Sponsors of clinical trials are permitted to sell
those devices distributed in the course of the study if the compensation
received does not exceed the costs of manufacture, research, development and
handling. A supplement for an investigational device exemption must be submitted
to and approved by the FDA before a sponsor or an investigator may make a
significant change to the investigational plan that may affect the plan's
scientific soundness or the rights, safety or welfare of human subjects.
Upon receipt of a premarket approval application, the FDA makes a
threshold determination as to whether the application is sufficiently complete
to permit a substantive review. If the FDA makes this determination, it will
accept the application for filing. Once the submission is accepted for filing,
the FDA begins an in-depth review of the application. An FDA review of a
premarket approval application generally takes one to two years from the date
the application is accepted for filing. However, this review period is often
significantly extended by requests for more information or clarification of
information already provided in the submission. During the review period, the
submission may be sent to an FDA-selected scientific advisory panel composed of
physicians and scientists with expertise in the particular field. The FDA
scientific advisory panel issues a recommendation to the FDA that may include
conditions for approval. The FDA is not bound by the recommendations of the
advisory panel. Toward the end of the premarket approval application review
process, the FDA will conduct an inspection of the manufacturer's facilities to
ensure that the facilities are in compliance with applicable good manufacturing
practice. If the FDA evaluations of both the premarket approval application and
the manufacturing facilities are favorable, the FDA will issue a letter. This
letter usually contains a number of conditions which must be met in order to
secure final approval of the application. When those conditions have been
fulfilled to the satisfaction of the FDA, the agency will issue an approval
letter authorizing commercial marketing of the device for specified indications
and intended uses.
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The premarket approval application review process can be expensive,
uncertain and lengthy. A number of devices for which a premarket approval has
been sought have never been approved for marketing. The FDA may also determine
that additional clinical trials are necessary, in which case the premarket
approval may be significantly delayed while trials are conducted and data is
submitted in an amendment to the premarket approval application. Modifications
to the design, labeling or manufacturing process of a device that has received
premarket approval may require the FDA to approve supplements or new
applications. Supplements to a premarket approval application often require the
submission of additional information of the same type required for an initial
premarket approval, to support the proposed change from the product covered by
the original application. The FDA generally does not call for an advisory panel
review for premarket approval supplements. If any premarket approvals are
required for our products, we may not be able to meet the FDA's requirements or
we may not receive any necessary approvals. Failure to comply with regulatory
requirements would have a material adverse effect on our business, financial
condition and results of operations.
Regulatory approvals and clearances, if granted, may include
significant labeling limitations and limitations on the indicated uses for which
the product may be marketed. In addition, to obtain regulatory approvals and
clearances, the FDA and some foreign regulatory authorities impose numerous
other requirements with which medical device manufacturers must comply. FDA
enforcement policy strictly prohibits the marketing of approved medical devices
for unapproved uses. Any products we manufacture or distribute under FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA. The FDA also requires us to provide it with information on death and
serious injuries alleged to have been associated with the use of our products,
as well as any malfunctions that would likely cause or contribute to death or
serious injury.
The FDA requires us to register as a medical device manufacturer and
list our products. We are also subject to biannual inspections by the FDA and
state agencies acting under contract with the FDA to confirm compliance with
good manufacturing practice. The good manufacturing practice regulations require
that we manufacture our products and maintain documents in a prescribed manner
with respect to manufacturing, testing, quality assurance and quality control
activities. The FDA also has promulgated final regulatory changes to these
regulations that require, among other things, design controls and maintenance of
service records. These changes will increase the cost of complying with good
manufacturing practice requirements.
We are also subject to a variety of other controls that affect our
business. Labeling and promotional activities are subject to scrutiny by the FDA
and, in some instances, by the Federal Trade Commission. The FDA actively
enforces regulations prohibiting marketing of products for unapproved users. We
are also subject, as are our products, to a variety of state and local laws and
regulations in those states and localities where our products are or will be
marketed. Any applicable state or local regulations may hinder our ability to
market our products in those regions. Manufacturers are also subject to numerous
federal, state and local laws relating to matters such as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and disposal of hazardous or potentially hazardous substances. We may be
required to incur significant costs to comply with these laws and regulations
now or in the future. These laws or regulations may have a material adverse
effect on our ability to do business.
International sales of our products are subject to the regulatory
requirements of each country in which we market our products. The regulatory
review process varies from country to country. The ISO 9000 series of standards
for quality operations establish standards of quality to which companies must
adhere to receive certification. The European Union has promulgated rules that
require medical products to affix the CE mark, an international symbol of
adherence to quality assurance standards and compliance with applicable European
medical device directives. The ISO 9001 certification is one of the CE mark
certification requirements. We currently have ISO 9001/EN46001 certification. If
we lose the right to affix the CE mark, we would be prohibited from selling our
products in member countries of the European Union. This could have a material
adverse effect on our business, financial condition and results of operations.
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We will rely on our collaborative partners to obtain most United States
and foreign regulatory approvals. If they are able to obtain these approvals, we
will rely upon our collaborative partners to remain in compliance with ongoing
United States and foreign regulatory restrictions. The inability or failure of
these third parties to comply with the varying regulations or the imposition of
new regulations would materially adversely affect our business, financial
condition and results of operations.
EMPLOYEES AND CONSULTANTS
As of December 31, 2000, we had 70 employees and consulting or other
contract arrangements with 50 additional persons to provide services to us on a
full- or part-time basis. Of the 120 people so employed or engaged by us, 64 are
engaged in research and development activities, 9 are engaged in sales and
marketing activities, 13 are engaged in regulatory affairs and quality
assurance, 18 are engaged in manufacturing and development, and 17 are engaged
in administration and accounting. No employees are covered by collective
bargaining agreements, and we believe we maintain good relations with our
employees.
Our ability to operate successfully and manage our potential future
growth depends in significant part upon the continued service of key scientific,
technical, managerial and finance personnel, and our ability to attract and
retain additional highly qualified personnel in these fields. None of these key
employees has an employment contract with us, nor are any of these employees
covered by key person or similar insurance, except our chief executive officer.
In addition, if we, together with our collaborative partners, are able to
successfully develop and commercialize our products, we will need to hire
additional scientific, technical, marketing, managerial and finance personnel.
We face intense competition for qualified personnel in these areas, many of whom
are often subject to competing employment offers. The loss of key personnel or
our inability to hire and retain additional qualified personnel in the future
could have a material adverse effect on our business, financial condition and
results of operations.
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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. Our 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:
WE HAVE A SHORT OPERATING HISTORY, WHICH MAKES IT DIFFICULT FOR YOU TO EVALUATE
OUR BUSINESS.
Because limited historical information is available on our operations,
it will be difficult for you to evaluate our business. Our prospects must be
considered in light of the substantial risks, expenses, uncertainties and
difficulties encountered by entrants into the medical device industry, which is
characterized by increasing intense competition and a high failure rate.
WE HAVE A HISTORY OF LOSSES, AND WE EXPECT LOSSES TO CONTINUE FOR SEVERAL YEARS.
We have never been profitable, and we have had operating losses since
our inception. We expect our operating losses to continue as we continue to
expend substantial resources to complete development of our products, obtain
regulatory clearances or approvals, build our marketing, sales, manufacturing
and finance organizations, and conduct further research and development. To
date, we have engaged primarily in research and development efforts. The further
development and commercialization of our products will require substantial
development, regulatory, sales and marketing, manufacturing and other
expenditures. We have only generated limited revenues from product sales. Our
accumulated deficit was about $32 million at December 31, 2000.
OUR ABILITY TO SELL OUR PRODUCTS IS CONTROLLED BY GOVERNMENT REGULATIONS, AND WE
MAY NOT BE ABLE TO OBTAIN ANY NECESSARY CLEARANCES OR APPROVALS.
The design, manufacturing, labeling, distribution and marketing of our
products are and will be subject to extensive and rigorous government
regulation, which can be expensive and uncertain and can cause lengthy delays
before we can begin selling our products.
IN THE UNITED STATES, THE FDA'S ACTIONS COULD DELAY OR PREVENT OUR
ABILITY TO SELL OUR PRODUCTS, WHICH WOULD ADVERSELY AFFECT OUR GROWTH
AND STRATEGY PLANS.
In order for us to market our products in the United States, we must
obtain clearance or approval from the FDA. We cannot be sure:
- that we will make timely filings with the FDA;
- that the FDA will act favorably or quickly on these
submissions;
- that we will not be required to submit additional information
or perform additional clinical studies;
- that we would not be required to submit an application for
premarket approval, rather than a premarket notification
submission; or
- that other significant difficulties and costs will not be
encountered to obtain FDA clearance or approval.
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The premarket approval process is more rigorous and lengthier than the
clearance process for premarket notifications; it can take several years from
initial filing and require the submission of extensive supporting data and
clinical information. For example, we previously filed a premarket notification
for our diabetes detection product, which was withdrawn when the FDA indicated
that this product should be submitted for premarket approval, including
submission of clinical study data. We do not have any other premarket
notifications or premarket approval applications pending, but we currently
believe our other cancer detection product and our glucose monitoring products
will require submission of applications for premarket approval.
The FDA may impose strict labeling or other requirements as a condition
of its clearance or approval, any of which could limit our ability to market our
products. Further, if we wish to modify a product after FDA clearance of a
premarket notification or approval of a premarket approval application,
including changes in indications or other modifications that could affect safety
and efficacy, additional clearances or approvals will be required from the FDA.
Any request by the FDA for additional data, or any requirement by the FDA that
we conduct additional clinical studies or submit to the more rigorous and
lengthier premarket approval process, could result in a significant delay in
bringing our products to market and substantial additional research and other
expenditures. Similarly, any labeling or other conditions or restrictions
imposed by the FDA on the marketing of our products could hinder our ability to
effectively market our products. Any of the above actions by the FDA could delay
or prevent altogether our ability to market and distribute our products.
Further, there may be new FDA policies or changes in FDA policies that could be
adverse to us.
IN FOREIGN COUNTRIES, INCLUDING EUROPEAN COUNTRIES, WE ARE ALSO SUBJECT
TO GOVERNMENT REGULATION, WHICH COULD DELAY OR PREVENT OUR ABILITY TO
SELL OUR PRODUCTS IN THOSE JURISDICTIONS.
In order for us to market our products in Europe and some other
international jurisdictions, we and our distributors and agents must obtain
required regulatory registrations or approvals. We must also comply with
extensive regulations regarding safety, efficacy and quality in those
jurisdictions. We may not be able to obtain any required regulatory
registrations or approvals, or we may be required to incur significant costs in
obtaining or maintaining such regulatory registrations or approvals we receive.
Delays in obtaining any registrations or approvals required to market our
products, failure to receive these registrations or approvals, or future loss of
previously obtained registrations or approvals would limit our ability to sell
our products internationally. For example, international 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 sell
our products in Europe, we must maintain ISO 9001 certification and CE mark
certification, which is an international symbol of quality and compliance with
applicable European medical device directives. Failure to receive or maintain
ISO 9001 or CE mark certification or other international regulatory approvals
would prevent us from selling in Europe.
EVEN IF WE OBTAIN CLEARANCE OR APPROVAL TO SELL OUR PRODUCTS, WE ARE
SUBJECT TO ONGOING REQUIREMENTS AND INSPECTIONS THAT COULD LEAD TO THE
RESTRICTION, SUSPENSION OR REVOCATION OF OUR CLEARANCE.
We and our collaborative partners will be required to adhere to
applicable FDA regulations regarding good manufacturing practice, which include
testing, control, and documentation requirements. We are subject to similar
regulations in foreign countries. Ongoing compliance with good manufacturing
practice 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 international jurisdictions by comparable agencies.
Failure to comply with these 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, failure to
obtain 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 limit our ability to operate and could
increase our costs.
SINCE WE WILL RELY PRINCIPALLY ON OUR COLLABORATIVE PARTNERS TO OBTAIN AND
MAINTAIN OUR REGULATORY APPROVALS, ANY FAILURE OF OUR COLLABORATIVE PARTNERS TO
PERFORM COULD HURT OUR OPERATIONS.
Because they have primary responsibility for regulatory compliance, the
inability or failure of our collaborative partners to comply with the varying
regulations, or the imposition of new regulations, would limit our ability to
produce and sell our products. We will solely rely upon Abbott, Roche and
Respironics to obtain United States and international regulatory approvals and
clearances for our glucose monitoring, diabetes detection and infant jaundice
products. We and Welch Allyn will jointly seek regulatory approvals for our
cervical cancer detection product, but we do not have control over the timing or
amount of resources Welch Allyn devotes to these activities.
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OUR SUCCESS LARGELY DEPENDS ON OUR ABILITY TO OBTAIN AND PROTECT THE PROPRIETARY
INFORMATION ON WHICH WE BASE OUR PRODUCTS.
Our success depends in large part upon our ability to establish and
maintain the proprietary nature of our technology through the patent process, as
well as our ability to license from others patents and patent applications
necessary to develop our products. If any of our patents are successfully
challenged, invalidated or circumvented, or our right or ability to manufacture
our products were to be proscribed or limited, our ability to continue to
manufacture and market our products could be adversely affected. In addition to
patents, we rely on trade secrets and proprietary know-how, which we seek to
protect, in part, through confidentiality and proprietary information
agreements. The other parties to these agreements may breach these provisions,
and we may not have adequate remedies for any breach. Additionally, our trade
secrets could otherwise become known to or be independently developed by
competitors.
We have been issued, in total, 31 U.S. patents. In addition, we have
filed for a total of 41 U.S. patents that are still in prosecution. One or more
of the patents we hold directly or licensed from third parties, including those
for the disposable components to be used with our glucose monitoring and infant
jaundice products, may be successfully challenged, invalidated or circumvented,
or we may otherwise be unable to rely on these patents. These risks are also
present for the process we use or will use for manufacturing our products. In
addition, our competitors, many of whom have substantial resources and have made
substantial investments in competing technologies, may apply for and obtain
patents that prevent, limit or interfere with our ability to make, use and sell
our products, either in the United States or in international markets.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. In
addition, the United States Patent and Trademark Office may institute litigation
or interference proceedings. The defense and prosecution of intellectual
property suits, Patent and Trademark Office proceedings and related legal and
administrative proceedings are both costly and time consuming. Moreover, we may
need to litigate to enforce our patents, to protect our trade secrets or
know-how, or to determine the enforceability, scope and validity of the
proprietary rights of others. Any litigation or interference proceedings
involving us may require us to incur substantial legal and other fees and
expenses and may require some of our employees to devote all or a substantial
portion of their time to the proceedings. An adverse determination in the
proceedings could subject us to significant liabilities to third parties,
require us to seek licenses from third parties or prevent us from selling our
products in some or all markets. We may not be able to reach a satisfactory
settlement of any dispute by licensing necessary patents or other intellectual
property. Even if we reached a settlement, the settlement process may be
expensive and time consuming, and the terms of the settlement may require us to
pay substantial royalties. An adverse determination in a judicial or
administrative proceeding or the failure to obtain a necessary license could
prevent us from manufacturing and selling our products.
OUR REVENUES WILL BE PRIMARILY DERIVED FROM SALES OF OUR PRODUCTS BY THIRD
PARTIES OVER WHOM WE HAVE LIMITED INFLUENCE, AND THEY MAY NOT BE ABLE TO
GENERATE SUFFICIENT SALES REVENUES TO SUSTAIN OUR GROWTH AND STRATEGY PLANS.
The revenues that we expect to receive from each of our collaborative
partners depend primarily on sales of our products, most of which are still in
development. We may not be able to successfully commercialize the products we
are developing. Even if we do, we, together with our collaborative partners, may
not be able to sell sufficient volumes of our products to generate substantial
profits for us. In addition, our profit margins on some of our products are not
likely to increase over time because the royalty rates and manufacturing profit
rates on those products are predetermined. The majority of our revenues and
profits are expected to be derived from royalties and manufacturing profits that
we will receive from Abbott, Roche and Respironics resulting from sales of the
products we are developing with each of these companies. Another significant
portion of our revenues and profits are expected to be derived from the sale of
cervical cancer detection products and we would share with Welch Allyn in the
revenues generated from sales of these products to distributors and end users.
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 these discounts or rebates to
expand the use of their products, which increases the market for the disposable
strips they sell for use with their products. Because Abbott has discretion to
determine the prices at which they sell our glucose monitoring devices, they may
choose to adopt this marketing strategy. If Abbott adopts this marketing
strategy and discounts the prices at which they sell our glucose monitoring
devices, the amounts we earn for these sales will be less. In this case,
royalties we earn on sales of our disposable cartridges may be less than the
amounts we would have earned had our glucose monitoring devices not been sold at
a discount.
BECAUSE OUR PRODUCTS, WHICH USE DIFFERENT TECHNOLOGY THAN OTHER MEDICAL DEVICES,
ARE OR WILL BE NEW TO THE MARKET, WE MAY NOT BE SUCCESSFUL IN LAUNCHING OUR
PRODUCTS AND OUR OPERATIONS AND GROWTH WOULD BE ADVERSELY AFFECTED.
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Our products are based on new methods of glucose monitoring, diabetes
detection, infant jaundice and cervical cancer detection. If they do not achieve
significant market acceptance, our sales will be limited and our financial
condition may suffer. Physicians and individuals may not recommend or use our
products unless they determine 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, our products have been used by only a limited number of
people, and few independent studies regarding our products have been published.
The lack of independent studies limits the ability of doctors or consumers to
compare our products to conventional products.
IF WE ARE UNABLE TO COMPETE EFFECTIVELY IN THE HIGHLY COMPETITIVE MEDICAL DEVICE
INDUSTRY, OUR FUTURE GROWTH AND OPERATING RESULTS WILL SUFFER.
The medical device industry in general, and the markets in which we
expect to offer products in particular, are intensely competitive. Many of our
competitors have substantially greater financial, research, technical,
manufacturing, marketing and distribution resources than we do and have greater
name recognition and lengthier operating histories in the health care industry.
We may not be able to effectively compete against these and other competitors.
For example, a number of competitors 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. Further, if our products are
not available at competitive prices, health care administrators who are subject
to increasing pressures to reduce costs may not elect to purchase them. Also, 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.
Furthermore, our competitors may succeed in developing, either before
or after the development and commercialization of our products, devices and
technologies that permit more efficient, less expensive non-invasive and less
invasive glucose monitoring, diabetes detection, infant jaundice or 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 our products obsolete.
In addition, one or more of our collaborative partners may, for
competitive reasons, reduce their support of their collaborative arrangement
with us or support, directly or indirectly, a company or product that competes
with our products. This would limit our ability to compete with others.
WE HAVE LITTLE MANUFACTURING EXPERIENCE, WHICH COULD LIMIT OUR GROWTH.
We do not have manufacturing experience that would enable us to make
products in the volumes that would be necessary for us to achieve significant
commercial sales. In addition, we may not be able to establish and maintain
reliable, efficient, full scale manufacturing at commercially reasonable costs,
in a timely fashion. Difficulties we encounter in manufacturing scale-up, or our
failure to implement and maintain our manufacturing facilities in accordance
with good manufacturing practice regulations, international quality standards or
other regulatory requirements, could result in a delay or termination of
production. To date, our manufacturing activities have only included our
BiliChek and BiliCal products, as well as the Accu-Chek D-Tector diabetes
detection product on a limited scale. If we obtain the necessary regulatory
approvals to market the diabetes detection product, we will undertake to
manufacture this product in significant volumes. Companies often encounter
difficulties in scaling up production, including problems involving production
yield, quality control and assurance, and shortages of qualified personnel.
SINCE WE RELY ON SOLE-SOURCE SUPPLIERS FOR SEVERAL OF OUR PRODUCTS, ANY FAILURE
OF THOSE SUPPLIERS TO PERFORM WOULD HURT OUR OPERATIONS.
Several of the components used in our products are available from only
one supplier, and substitutes for these components are infeasible or would
require substantial modifications to our products. Any significant problem
experienced by one of our sole source suppliers may result in a delay or
interruption in the supply of components to us until that 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 our
manufacturing operations. The microspectrometer and disposable calibration
element, components of our infant jaundice product, and the blue light module
and calibration element, components of our diabetes detection product, are each
available from only one supplier. For our products which require premarket
approval, the inclusion of substitute components could require us to qualify the
new supplier with the appropriate government regulatory authorities.
Alternatively, for our products which qualify for premarket notification, the
substitute components must meet our product specifications.
OUR LIMITED MARKETING AND SALES EXPERIENCE MAKES OUR INTERNATIONAL REVENUE
UNCERTAIN.
We are responsible for marketing our infant jaundice product in
countries other than the United States and Canada. We have relatively limited
experience in marketing or selling medical device products and only have a nine
person marketing and sales staff. In order to
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successfully continue to market and sell our infant jaundice product
outside the United States and Canada, we must either develop a marketing and
sales force or expand our arrangements with third parties to market and sell
this product. We may not be able to successfully develop an effective marketing
and sales force, and we may not be able to enter into and maintain marketing and
sales agreements with third parties on acceptable terms. If we develop our own
marketing and sales capabilities, we will compete with other companies that have
experienced and well-funded marketing and sales operations. If we enter into a
marketing arrangement with a third party for the marketing and sale of our
infant jaundice product outside the United States and Canada, any
revenues we would receive from this product will be dependent on this third
party, and we will likely be required to pay a sales commission or similar
compensation to this party. Furthermore, we are currently dependent on the
efforts of Abbott and Roche for any revenues to be received from our glucose
monitoring and diabetes detection products. The efforts of these third parties
for the marketing and sale of our products may not be successful.
BECAUSE WE OPERATE IN AN INDUSTRY WITH SIGNIFICANT PRODUCT LIABILITY RISK, AND
WE HAVE NOT SPECIFICALLY INSURED AGAINST THIS RISK, WE MAY BE SUBJECT TO
SUBSTANTIAL CLAIMS AGAINST OUR PRODUCTS.
The development, manufacture and sale of medical products entail
significant risks of product liability claims. We currently have no product
liability insurance coverage beyond that provided by our general liability
insurance. Accordingly, we may not be adequately protected from any liabilities,
including any adverse judgments or settlements, we might incur in connection
with the development, clinical testing, manufacture and sale of our products. A
successful product liability claim or series of claims brought against us that
results in an adverse judgment against or settlement by us in excess of any
insurance coverage could seriously harm our financial condition or reputation.
In addition, product liability insurance is expensive and may not be available
to us on acceptable terms, if at all.
IF WE CANNOT OBTAIN ADDITIONAL FUNDS WHEN NEEDED, WE WILL NOT BE ABLE TO
IMPLEMENT OUR BUSINESS PLAN.
We will require substantial additional capital to develop our products,
including completing product testing and clinical trials, obtaining all required
regulatory approvals and clearances, beginning and scaling up manufacturing, and
marketing our products. Any failure of our collaborative partners to fund our
capital expenditures, or our inability to obtain capital through other sources,
would limit our ability to grow and operate as planned. Under our collaborative
arrangements with Abbott, Roche, Respironics and Welch Allyn, these
collaborative partners will either directly undertake the activities to develop
our products or will fund a substantial portion of these expenditures. The
obligations of our collaborative partners to fund our expenditures is largely
discretionary and depends on a number of factors, including our ability to meet
specified milestones in the development and testing of our products. We may not
be able to meet these milestones, or our collaborative partners may not continue
to fund our expenditures.
In addition to funds that we expect to be provided by our collaborative
partners, we may be required to raise additional funds through public or private
financing, additional collaborative relationships or other arrangements. We
believe that our existing capital resources and the funding from our
collaborative partners will be sufficient to satisfy our funding requirements
through 2001, but may not be sufficient to fund our operations to the point of
commercial introduction of either of our glucose monitoring products or our
cervical cancer product. Any required additional funding may not be available on
terms attractive to us, or at all, would limit our ability to continue to
develop and introduce products to market. Any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants that would limit how we conduct our business or finance
our operations.
THE AVAILABILITY OF THIRD-PARTY REIMBURSEMENT FOR OUR PRODUCTS IS UNCERTAIN,
WHICH MAY LIMIT CONSUMER USE AND THE MARKET FOR OUR PRODUCTS.
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. Any inability of patients, hospitals,
physicians and other users of our products to obtain sufficient reimbursement
from third-party payors for our products, or adverse changes in relevant
governmental policies or the policies of private third-party payors regarding
reimbursement for these products, could limit our ability to sell our products
on a competitive basis. We are unable to predict what changes will be made in
the reimbursement methods used by third-party health care payors. Moreover,
third-party payors are increasingly challenging the prices charged for medical
products and services, and some health care providers are gradually adopting a
managed care system in which the providers contract to provide comprehensive
health care services for a fixed cost per person. Patients, hospitals and
physicians may not be able to justify the use of our products by the attendant
cost savings and clinical benefits that we believe will be derived from the use
of our products, and therefore may not be able to obtain third-party
reimbursement.
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Reimbursement and health care payment systems in international markets
vary significantly by country and include both government sponsored health care
and private insurance. We may not be able to obtain approvals for reimbursement
from these international third-party payors in a timely manner, if at all. Any
failure to receive international reimbursement approvals could have an adverse
effect on market acceptance of our products in the international markets in
which approvals are sought.
OUR SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT AND RETAIN SCIENTIFIC, TECHNICAL,
MANAGERIAL AND FINANCE PERSONNEL.
Our ability to operate successfully and manage our future growth
depends in significant part upon the continued service of key scientific,
technical, managerial and finance personnel, as well as our ability to attract
and retain additional highly qualified personnel in these fields. We may not be
able to attract and retain key employees when necessary, which would limit our
operations and growth. None of our key employees have an employment contract
with us, nor are any of these employees, except our chief executive officer,
covered by key person or similar insurance. In addition, if we are able to
successfully develop and commercialize our products, we will need to hire
additional scientific, technical, marketing, managerial and finance personnel.
We face intense competition for qualified personnel in these areas, many of whom
are often subject to competing employment offers.
WE ARE CONTROLLED BY OUR DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATED
ENTITIES.
Our directors, executive officers and entities affiliated with them
beneficially owned an aggregate of about 30% of our outstanding common stock as
of December 31, 2000. These stockholders, acting together, would be able to
control substantially all matters requiring approval by our stockholders,
including the election of directors and the approval of mergers and other
business combination transactions.
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ITEM 2. PROPERTIES
We lease about 38,000 square feet in Norcross, Georgia, which comprise
our administrative, research and development, marketing and production
facilities and our planned manufacturing facility. Our lease for the portion of
this facility housing the finance department and some of our planned
manufacturing operations extends through December 2001, the portions housing
research and development operations expire in June 2002 and March 2003 and the
portion housing administration, sales and marketing, engineering and other
planned manufacturing operations expires in March 2004.
ITEM 3. LEGAL PROCEEDINGS
On March 9, 2000, we filed a Demand for Arbitration of disputes arising
under our license agreement with Altea, Non-Invasive Monitoring and our former
vice president, Jonathan Eppstein, who is also a principal in Altea and
Non-Invasive Monitoring. We sought an interpretation of portions of the license
agreement relating to our obligation to assign future intellectual property
rights and relief and damages for these and other issues. Altea had sent two
letters to us purporting to give notice of our material breach of the license
agreement for failure to assign specified intellectual property rights to Altea
or Non-Invasive Monitoring and to participate in a joint development program and
other items. Final arguments were held October 23, 2000 and a decision was
entered on November 7, 2000 when the arbitration panel denied the claims for
damages by both parties. They also denied the claims by Altea and Non-Invasive
Monitoring that we were in breach due to our failure to continue a program of
joint development and that we had breached the license and joint development
agreement. The panel interpreted the scope of joint technology under the
agreement as requested by Altea and as a result, said that two patent
applications should be jointly assigned to Altea. The Panel also resolved a
dispute over stock options in effect at the time Altea and Non-Invasive
Monitoring principal Jonathan Eppstein's employment ended at SpectRx. The panel
also denied the claims of both sides for attorney's fees and expenses of
arbitration.
On December 11, 2000, Altea and Non-Invasive Monitoring filed a new
Demand for Arbitration of certain disputes arising under the licensing agreement
with us. Altea and Non-Invasive Monitoring sought to require us to engage in
future agreements with Altea for joint development, to obtain assignment of
additional patents, to have us held liable for specified actions by a
subcontractor and to receive a finding that commercialization has not occurred.
Subsequently, we filed a Motion to Dismiss or Limit Issues for Arbitration. On
March 13, 2001, the panel issued an order dismissing the issue regarding
commercialization filed by Altea and Non-Invasive Monitoring. We are continuing
with arbitration on the remaining items. We
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believe that Altea's claims are without merit but intend to abide by the
decision of this second arbitration panel as to the proper scope of our duty to
assign future intellectual property rights under the license agreement and to
participate in a joint development program.
On August 16, 2000, we filed a complaint for Declaratory Judgment
against Ampersand Medical Corp. seeking a declaration that we have not
misappropriated or improperly disclosed any alleged confidential information or
alleged trade secrets disclosed to us by Ampersand. Ampersand subsequently filed
a counter-suit in Illinois against us, alleging that we had misappropriated
trade secrets belonging to Ampersand. The parties have agreed to mediation, and
the counter-suit filed in Illinois by Ampersand will be withdrawn and refiled in
Gwinnett County, Georgia if mediation is unsuccessful. We believe Ampersand's
claims are without merit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is traded on the Nasdaq National Market under the
ticker symbol SPRX. The number of record holders of our common stock at February
28, 2001 was 105.
We completed an initial public offering of 2,361,699 shares of common
stock in July 1997. Before the initial public offering, our common stock was not
publicly traded.
The high and low last sales prices for the calendar years 1999 and 2000
as reported by the Nasdaq National Market are as follows:
1999 2000
----------------------- -----------------------
HIGH LOW HIGH LOW
------ ------ ------ ------
First Quarter $ 8.00 $4.875 $18.00 $11.875
Second Quarter $8.125 $ 6.00 $14.50 $ 9.00
Third Quarter $11.25 $ 7.25 $10.25 $ 7.625
Fourth Quarter $12.50 $ 8.25 $10.25 $ 7.315
We have not paid any dividends since our inception and do not intend
to pay any dividends in the foreseeable future.
On July 1, 1997, we completed our initial public offering of 2,361,699
shares of our common stock, $0.001 par value per share, at a public offering
price of $7.00 per share. Hambrecht & Quist LLC and Volpe Brown Whelan &
Company, LLC were the managing underwriters of the offering. Aggregate gross
proceeds to us were $15,120,000 before deduction of underwriting discounts and
commissions and expenses of the offering. We paid underwriting discounts and
commissions of $1,058,400 and other expenses of about $896,000 in connection
with the offering. The total expenses paid by us in the offering were
$1,954,400, and the net proceeds to us were $13,165,600.
In conjunction with the amendment of the agreement with Abbott in
November 1999, we received a total of $5.25 million in November 1999 ($2.75
million) and January 2000 ($2.25 million) in exchange for 525,000 shares of our
redeemable convertible preferred stock under the exemption from registration
provided by Regulation D of the Securities Act of 1933. This preferred stock is
classified as debt on our balance sheet but can be converted into common stock
at any time after the first anniversary of the issue date, and automatically on
December 31, 2004, at a conversion rate equal to the greater of $9.388 per share
or the average of the closing sale price of our common stock on the Nasdaq
National Market for a specified period of time. The funds received are to be
applied to research for the continuous monitoring technology.
In February 2000, we sold 400,000 shares of common stock in a private
placement transaction to a small group of individual investors for total gross
proceeds of $5.0 million under the exemption from registration provided by
Regulation D of the Securities Act of 1933.
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ITEM 6. SELECTED FINANCIAL DATA
SPECTRX
(IN THOUSANDS EXCEPT FOR PER SHARE FIGURES)
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
STATEMENTS OF OPERATIONS DATA:
REVENUES $ 4,968 $ 3,337 $ 1,406 $ 901 $ 452
COST AND EXPENSES:
COST OF PRODUCT SALES 1,732 1,708 1,626 0 0
RESEARCH & DEVELOPMENT 5,804 5,170 4,234 3,714 1,815
MARKETING 957 900 1,058 835 221
GENERAL & ADMINISTRATIVE 3,177 2,222 1,908 2,272 1,526
------- ------- ------- -------- -------
LOSS FROM OPERATIONS (6,702) (6,663) (7,420) (5,920) (3,110)
NET INTEREST AND OTHER INCOME (EXPENSE) 355 125 783 194 (68)
------- ------- ------- -------- -------
NET LOSS $(6,347) $(6,538) $(6,637) $ (5,726) $(3,178)
PREFERRED STOCK DIVIDENDS (315) (14) 0 0 0
------- ------- ------- -------- -------
LOSS AVAILABLE TO COMMON SHARE STOCKHOLDERS $(6,662) $(6,552) $(6,637) $ (5,726) $(3,178)
======= ======= ======= ======== =======
NET LOSS PER SHARE
BASIC $ (.79) $ (.82) $ (.84) $ (1.26) $ (2.13)
DILUTED $ (.79) $ (.82) $ (.84) $ (1.26) $ (2.13)
SHARES USED TO COMPUTE NET LOSS PER SHARE
BASIC 8,429 8,033 7,926 4,528 1,494
DILUTED 8,429 8,033 7,926 4,528 1,494
CONSOLIDATED BALANCE SHEET DATA
TOTAL ASSETS 7,148 7,693 7,654 14,999 5,946
TOTAL LONG TERM OBLIGATIONS, INCLUDING 5,960 5,645 0 752 250
CONVERTIBLE, REDEEMABLE PREFERRED STOCK
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this report which express "belief", "anticipation" or
"expectation" as well as other statements which are not historical facts 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 risks and uncertainties that could
cause actual results to differ materially from historical results or anticipated
results, including those listed under "Risk Factors" and elsewhere in this
report. Examples of these uncertainties and risks include, but are not limited
to:
- whether our products in development will prove safe and
effective;
- whether and when we or our strategic partners will obtain
approval from the FDA and corresponding foreign agencies;
- our need to achieve manufacturing scale-up in a timely manner,
and our need to provide for the efficient manufacturing of
sufficient quantities of our products;
- the lack of immediate alternate sources of supply for some
critical components of our products;
- our patent and intellectual property position;
- the need to fully develop the marketing, distribution,
customer service and technical support and other functions
critical to the success of our potential product lines;
- the effectiveness and ultimate market acceptance of our
products; and
- the dependence on our strategic partners for funding,
development assistance, clinical trials, distribution and
marketing of products developed by us.
The following discussion should be read in conjunction with our financial
statements and notes thereto included elsewhere in this report.
OVERVIEW
We were incorporated on October 27, 1992, and since that date we raised
capital through the sale of preferred stock, issuance of debt securities, public
and private sales of common stock and funding from collaborative arrangements.
Following our initial funding in early 1993, we immediately began research and
development activities with the objective of commercializing less invasive
diagnostic, screening and monitoring products. As part of our business strategy,
we have established arrangements with leading medical device companies for the
development, commercialization and introduction of our products. We have entered
into collaborative arrangements with Respironics for our infant jaundice
product, with Welch Allyn for our cancer detection product, with Abbott for our
glucose monitoring products, and with Roche for our diabetes detection product.
In December 1996, we sublicensed specified technology to and acquired a 64.8%
interest in FluorRx, Inc., a Delaware corporation formed for the purpose of
developing and commercializing technology related to fluorescence spectroscopy.
At December 31, 2000, as a result of subsequent financings, our interest in
FluorRx was 43%.
We have a limited operating history upon which our prospects can be
evaluated. Our prospects must be considered in light of the substantial risks,
expenses and difficulties encountered by entrants into the medical device
industry. This industry is characterized by an increasing number of
participants, intense competition and a high failure rate. We have experienced
operating losses since our inception, and, as of December 31, 2000, we have an
accumulated deficit of about $32.0 million. To date, we have engaged primarily
in research and development efforts. We first generated revenues from product
sales in 1998, but do not have significant experience in manufacturing,
marketing or selling our products. Our development efforts may not result in
commercially viable products, and we may not be successful in introducing our
products. Moreover, required regulatory clearances or approvals may not be
obtained in a timely manner, or at all. Our products may not ever gain market
acceptance, and we may not ever generate significant revenues or achieve
profitability. The development and commercialization of our products will
require substantial development, regulatory, sales and marketing, manufacturing
and other expenditures. We expect our operating losses to continue through 2001
as we continue to expend substantial resources to complete development of our
products, obtain regulatory clearances or approvals, build our marketing, sales,
manufacturing and finance organizations and conduct further research and
development.
The majority of our revenues and profits are expected to be derived
from royalties and manufacturing profits that we will receive from Abbott, Roche
and Respironics resulting from
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sales of the products for which we have collaborative arrangements with each of
these companies. The royalties and manufacturing profits that we expect to
receive from each of our collaborative partners depend on sales of these
products. We and our collaborative partners may not be able to sell sufficient
volumes of our products to generate substantial royalties and manufacturing
profits for us.
We have entered into collaborative arrangements with Respironics, Welch
Allyn, Abbott and Roche. The agreements evidencing these collaborative
arrangements grant a substantial amount of discretion to each collaborative
partner. If one or more of our collaborative partners were to terminate their
arrangement with us, we would either need to reach agreement with a replacement
collaborative partner or undertake, at our own expense, the activities
previously handled by our collaborative partner. This would require us to
develop expertise we do not currently possess, would significantly increase our
capital requirements and would limit the programs we could pursue. We would
likely encounter significant delays in introducing our products, and the
development, manufacture and sales of our products would be adversely affected
by the absence of collaborative arrangements.
RESULTS OF OPERATIONS
Comparison of 2000 and 1999
General. Loss available to common stockholders increased to about $6.7
million, or ($.79) per share, for the year ended December 31, 2000 from about
$6.6 million, or ($.82) per share, in 1999. This increased loss was due
primarily to increases in research and development expenses and administrative
expenses. We expect net losses to continue. If we are unable to attain specified
milestones under collaboration agreements, our collaborative partner may not
make milestone payments under, or may terminate altogether, the agreement. If
this were to happen, future net losses would escalate rapidly because of
spending increases necessary to complete research, development and clinical
trials of our products, begin sales and marketing efforts and establish a
manufacturing capability. This would delay some of our product development
activities.
Revenues and Cost of Product Sales. Revenues increased to about $5.0
million for the year ended December 31, 2000 from about $3.3 million in 1999.
The increase was both in revenue from product sales and milestones from
collaboration partners. The primary reason product sales increased was that our
BiliChek product line grew 29% to about $1.9 million in 2000. Revenue from
collaborative agreements, which is generally in the form of milestone payments
increased to about $2.7 million for the year ended December 31, 2000 from about
$1.9 million in 1999, $2.5 million of the milestones were received from Abbott
for our continuous glucose monitoring program. Cost of product sales were about
$1.7 million for the year ended December 31, 2000, unchanged from $1.7 million
in 1999. All cost of sales are related to product sales. Those costs did not
exceed sales revenues for the first time in 2000, but at a relatively low
margin, because we are in the early stages of product introduction and have
excess capacity.
Research and Development Expenses. Research and development expenses
increased to about $5.8 million for the year ended December 31, 2000 from about
$5.2 million in 1999. The increase in research and development expenses was
primarily due to increases in employee costs of $816,000, costs of prototype
materials of $317,000, temporary help and consulting costs of $237,000, royalty
expenses of $279,000, primarily related to the initiatives in continuous glucose
monitoring and cancer detection, internal and external clinical costs of
$118,000 for our infant jaundice and diabetes detection products. Research and
development costs increases were offset by an increase of reimbursements by our
collaborative partners of $1,046,000. We expect research and development
expenses to decrease in the future even as we expand clinical trials for our
products, because we expect increased reimbursement for our continuous glucose
monitoring activities.
Sales and marketing expenses. Sales and marketing expenses increased to
about $957,000 for the year ended December 31, 2000 from $900,000 in 1999. The
increase was due primarily to increases in marketing materials of $36,000 and
consulting costs for Latin and South America of $26,000. Sales and marketing
expenses are expected to increase in the future as we expand our marketing
effort for this product in additional territories.
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32
General and administrative expenses. General and administrative
expenses increased to about $3.2 million for the year ended December 31, 2000
from about $2.2 million in 1999. The increase in general and administrative
expense was due to the increases in legal fees of $700,000, compensation costs
of $50,000, recruiting costs of $30,000 and costs of contractual agreements of
$130,000. The increase in legal fees is primarily due to expenses incurred for
the Altea arbitration and other activities to protect our intellectual property.
General and administrative expenses are expected to increase in the future as a
result of overhead costs associated with expanded research and development
activities, and continuing legal and litigation expenses.
Net interest income and other expense. Net interest and other income
increased to about $355,000 for the year ended December 31, 2000 from $125,000
in 1999. This increase results primarily from interest received on higher
average cash balances in 2000.
Comparison of 1999 and 1998
General. Loss available to common stockholders was about $6.5 million,
or ($.82) per share, for the year ended December 31, 1999 compared to about $6.6
million, or ($.84) per share, in 1998. These net losses were due to increases in
cost of production, research and development expenses and administrative
expenses.
Revenues and Cost of Product Sales. Revenues increased to about $3.3
million for the year ended December 31, 1999 from about $1.4 million in 1998.
The increase was both in revenue from product sales and milestones from
collaboration partners. Product sales of our BiliCheck product grew 75% to about
$1.4 million in 1999. Revenue from collaborative agreements, which is generally
in the form of milestone payments, increased to about $1.9 million for the year
ended December 31, 1999 from about $600,000 in 1998. Cost of product sales were
about $1.7 million for the year ended December 31, 1999, compared to $1.6
million in 1998. All cost of sales are related to product sales, and those costs
exceeded sales revenues because we are in the early stages of product
introduction and have excess capacity.
Research and Development Expenses. Research and development expenses
increased to about $5.2 million for the year ended December 31, 1999 from about
$4.2 million in 1998. The increase in research and development expenses was
primarily due to increases in prototype materials costs of $290,000, temporary
help costs of $130,000, royalty expense of $125,000, primarily related to the
initiatives in continuous glucose monitoring and cancer detection clinical costs
of $70,000 for our infant jaundice and diabetes detection products, legal
expenses of $183,000 for patent filings and patent maintenance and a reduction
in reimbursed expenses.
Sales and marketing expenses. Sales and marketing expenses decreased to
about $900,000 for the year ended December 31, 1999 from about $1.1 million in
1998. The decrease was due primarily to decreases in costs of marketing
materials of $112,000 and travel costs of $56,000 related to the infant jaundice
product introduction and marketing activity.
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33
General and administrative expenses. General and administrative
expenses increased to about $2.2 million for the year ended December 31, 1999
from about $1.9 million in 1998. The increase in general and administrative
expense was due to the increases in compensation expense of $112,000 and outside
professional fees of $148,000.
Net interest income and other expense. Net interest and other income
decreased to $125,000 for the year ended December 31, 1999 from $783,000 in
1998. This decrease results primarily from recognizing $329,000 of income in
1998 relating to the de-consolidation of FluorRx and lower interest income due
to lower cash balances.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through
private sales of our debt and equity securities and the public sale of our
common stock. From October 27, 1992, our date of inception, through December 31,
2000, we received about $36.52 million in net proceeds from sales of our debt
and equity securities. At December 31, 2000, we had cash of about $3.6 million
and working capital of about $3.4 million. We completed an initial public
offering of our common stock on July 7, 1997, which resulted in our receipt of
net proceeds of about $13.2 million. In November 1999, we received $2.75 million
from our sale of redeemable convertible preferred stock to Abbott in conjunction
with an amendment to our agreement with Abbott for research and development of
our glucose monitoring technology.
After December 31, 1999, we received additional financing. In January
2000, we received $2.5 million from of our sale of redeemable convertible
preferred stock to Abbott, and in February 2000 we received $5.0 million in
gross proceeds from the sale of 400,000 shares of our common stock in a private
placement transaction.
Our major cash flows in 2000 consisted of cash out-flow of $5.6 million
from operations and $440,000 in additions to property and equipment, offset by
the $5.0 million of private placement financing and the $2.25 million
redeemable, convertible preferred financing.
In addition to funds that we expect to be provided by our collaborative
partners, we may be required to raise additional funds through public or private
financing, additional collaborative relationships or other arrangements. We
believe that our existing capital resources will be sufficient to satisfy our
funding requirements for at least the next 12 months. However, these resources
may not be sufficient to fund our operations to the point of commercial
introduction of our glucose monitoring product.
We currently invest our excess cash balances primarily in short-term,
investment-grade, interest-bearing obligations until the funds are used in
operations. Substantial capital will be required to develop our products,
including completing product testing and clinical trials, obtaining all required
FDA and foreign regulatory approvals and clearances, beginning and scaling up
manufacturing and marketing our products. Any failure of our collaborative
partners to fund our development expenditures would have a material adverse
effect on our business, financial condition and results of operations.
OTHER MATTERS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE REGARDING MARKET RISK
We have not entered into any transactions using derivative financial
instruments and believe our exposure to interest rate risk, foreign currency
exchange rate risk and other relevant market risks is not material.
ITEM 8. FINANCIAL STATEMENTS
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SpectRx, Inc.:
We have audited the accompanying balance sheets of SPECTRX, INC. (a Delaware
corporation) as of December 31, 1999 and 2000 and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SpectRx, Inc. as of December
31, 1999 and 2000 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Atlanta, Georgia
February 16, 2001
35
SPECTRX, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS 1999 2000
-------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 2,143 $ 3,609
Accounts receivable, net of allowance for doubtful
accounts of $69 and $138 in 1999 and 2000,
respectively 952 1,259
Inventories 541 481
Subscription receivable 2,500 0
Other current assets 204 377
-------- --------
Total current assets 6,340 5,726
-------- --------
PROPERTY AND EQUIPMENT, NET 839 894
-------- --------
OTHER ASSETS:
Other assets, net 15 0
Due from related parties 499 528
-------- --------
Total other assets 514 528
-------- --------
$ 7,693 $ 7,148
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 2000
-------- --------
CURRENT LIABILITIES:
Accounts payable $ 670 $ 1,020
Accrued liabilities 908 1,262
-------- --------
Total current liabilities 1,578 2,282
-------- --------
COLLABORATIVE PARTNER ADVANCE 381 381
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
REDEEMABLE CONVERTIBLE PREFERRED STOCK 5,264 5,579
-------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value; 5,000
shares authorized, 525 shares issued
and outstanding as redeemable
convertible preferred stock in 1999
and 2000 0 0
Common stock, $.001 par value; 50,000
shares authorized, 8,056 and 8,508
shares issued and outstanding in 1999
and 2000, respectively 8 9
Additional paid-in capital 25,888 30,927
Deferred compensation (58) 0
Notes receivable from officers (31) (31)
Accumulated deficit (25,337) (31,999)
-------- --------
Total stockholders' equity
(deficit) 470 (1,094)
-------- --------
$ 7,693 $ 7,148
======== ========
The accompanying notes are an integral part of these balance sheets.
36
SPECTRX, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
1998 1999 2000
-------- -------- --------
REVENUES:
Product sales $ 823 $ 1,440 $ 2,219
Collaborative agreements 583 1,897 2,749
-------- -------- --------
Total revenue 1,406 3,337 4,968
-------- -------- --------
COSTS AND EXPENSES:
Cost of product sales 1,626 1,708 1,732
Research and development 4,234 5,170 5,804
Sales and marketing 1,058 900 957
General and administrative 1,908 2,222 3,177
-------- -------- --------
8,826 10,000 11,670
-------- -------- --------
Operating loss (7,420) (6,663) (6,702)
INTEREST INCOME, NET 462 133 334
OTHER EXPENSE (INCOME) (321) 8 21
-------- -------- --------
NET LOSS (6,637) (6,538) (6,347)
PREFERRED STOCK DIVIDENDS 0 (14) (315)
-------- -------- --------
LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (6,637) $ (6,552) $ (6,662)
======== ======== ========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.84) $ (0.82) $ (0.79)
======== ======== ========
BASIC AND DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING 7,926 8,033 8,429
======== ======== ========
The accompanying notes are an integral part of these statements.
37
SPECTRX, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE STOCKHOLDERS'
--------------- PAID-IN DEFERRED FROM ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL COMPENSATION OFFICERS DEFICIT (DEFICIT)
------ ------ ---------- ------------ -------- ----------- -------------
BALANCE, DECEMBER 31, 1997 7,748 $ 8 $25,372 $(210) $(48) $(12,148) $ 12,974
Exercise of stock options 169 0 37 0 0 0 37
Employee stock purchase plan 14 0 63 0 0 0 63
Amortization of deferred compensation 0 0 0 76 0 0 76
Conversion of subordinated promissory
notes to equity securities 83 0 289 0 0 0 289
Repayment of note receivable from officer 0 0 0 0 17 0 17
Net loss 0 0 0 0 0 (6,637) (6,637)
----- --- ------- ----- ---- -------- --------
BALANCE, DECEMBER 31, 1998 8,014 8 25,761 (134) (31) (18,785) 6,819
Exercise of stock options 31 0 84 0 0 0 84
Employee stock purchase plan 11 0 43 0 0 0 43
Amortization of deferred compensation 0 0 0 76 0 0 76
Dividend on preferred stock 0 0 0 0 0 (14) (14)
Net loss 0 0 0 0 0 (6,538) (6,538)
----- --- ------- ----- ---- -------- --------
BALANCE, DECEMBER 31, 1999 8,056 8 25,888 (58) (31) (25,337) 470
Issuance of common stock 406 1 4,863 0 0 0 4,804
Exercise of stock options 37 0 107 0 0 0 167
Employee stock purchase plan 9 0 69 0 0 0 69
Amortization of deferred compensation 0 0 0 58 0 0 58
Dividend on preferred stock 0 0 0 0 0 (315) (315)
Net loss 0 0 0 0 0 (6,347) (6,347)
----- --- ------- ----- ---- -------- --------
BALANCE, DECEMBER 31, 2000 8,508 $ 9 $30,927 $ 0 $(31) $(31,999) $ (1,094)
===== === ======= ===== ==== ======== ========
The accompanying notes are an integral part of these statements.
38
SPECTRX, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
(IN THOUSANDS)
1998 1999 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,637) $ (6,538) $ (6,347)
-------- -------- --------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 375 374 400
Gain on deconsolidation of FluorRx (329) 0 0
Retirement of property and equipment 0 38 0
Amortization of deferred compensation 76 76 58
Changes in operating assets and liabilities:
Accounts receivable (129) (269) (307)
Inventories (186) (137) 60
Other current assets (16) (85) (173)
Accounts payable (79) 234 350
Accrued liabilities (4) 509 354
-------- -------- --------
Total adjustments (292) 740 742
-------- -------- --------
Net cash used in operating activities (6,929) (5,798) (5,605)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (321) (251) (440)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net 100 127 5,040
Issuance of redeemable convertible preferred stock 0 2,750 2,500
Due from related parties (29) (28) (29)
Advance from a collaborative partner 0 381 0
Repayment of note receivable from officer 17 0 0
-------- -------- --------
Net cash provided by financing activities 88 3,230 7,511
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (7,162) (2,819) 1,466
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 12,124 4,962 2,143
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,962 $ 2,143 $ 3,609
======== ======== ========
CASH PAID FOR:
Interest $ 8 $ 2 $ 3
======== ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Conversion of subordinated promissory notes to
equity securities $ 289 $ 0 $ 0
======== ======== ========
Payment of dividends in the form of redeemable
convertible preferred stock $ 0 $ 14 $ 315
======== ======== ========
Common stock issued for royalty payments $ 0 $ 0 $ 60
======== ======== ========
The accompanying notes are an integral part of these statements.
39
SPECTRX, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 2000
1. Organization and Background
SpectRx, Inc. (the "Company"), a Delaware corporation, is engaged
in the research and development of products that offer painless and less
invasive alternatives to blood tests currently used for glucose monitoring,
diabetes screening, and infant jaundice. The Company is also in the process of
developing a cervical cancer detection system. The Company's goal is to develop
and commercialize products that improve patient well-being and reduce health
care costs since they reduce or eliminate pain, are convenient to use, and
provide rapid results at the point of care. The Company's infant jaundice
product and products in development for glucose monitoring, diabetes screening,
and cervical cancer are based on proprietary biophotonic and microporation
technologies that can eliminate the pain and inconvenience of a blood sample.
The Company has entered into collaborative arrangements with Abbott Laboratories
("Abbott"), Roche Diagnostics BMC ("Roche"), Respironics, Inc. ("Respironics"),
and Welch Allyn, Inc. ("Welch Allyn") to facilitate the development,
commercialization, and introduction of its glucose monitoring, diabetes
screening, infant jaundice, and cervical cancer detection products,
respectively.
The Company has a limited operating history upon which its prospects
can be evaluated. The Company's prospects must be considered in light of the
substantial risks, expenses and difficulties encountered by entrants into the
medical device industry. This industry is characterized by an increasing number
of participants, intense competition and a high failure rate. The Company has
experienced operating losses since its inception, and, as of December 31, 2000,
it has an accumulated deficit of about $32.0 million. To date, the Company has
engaged primarily in research and development efforts. The Company first
generated revenues from product sales in 1998, but does have significant
experience in manufacturing, marketing or selling its products. The Company's
development efforts may not result in commercially viable products, and it may
not be successful in introducing its products. Moreover, required regulatory
clearances or approvals may not be obtained in a timely manner, or at all. The
Company's products may not ever gain market acceptance, and the Company may not
ever generate significant revenues or
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40
achieve profitability. The development and commercialization of the Company's
products will require substantial development, regulatory, sales and marketing,
manufacturing and other expenditures. The Company expects operating losses to
continue through 2001 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 it will receive from
Abbott, Roche and Respironics resulting from sales of the products for which it
has collaborative arrangements with each of these companies. The royalties and
manufacturing profits that the Company expects to receive from each of its
collaborative partners depend on sales of these products. The Company and its
collaborative partners may not be able to sell sufficient volumes of its
products to generate substantial royalties and manufacturing profits for the
Company.
2. Summary of Significant Accounting Policies
Presentation
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash or cash equivalents.
Inventories
Inventories are stated at lower of cost or market using the
first-in, first-out method. Inventories are summarized as follows at December
31, 1999 and 2000 (in thousands):
1999 2000
---- ----
Raw materials $323 $380
Work in process 78 11
Finished goods 140 90
---- ----
$541 $481
==== ====
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41
Property and Equipment
Property and equipment are recorded at cost. Depreciation is
computed using the straight-line method over estimated useful lives of five to
seven years. Expenditures for repairs and maintenance are expensed as incurred.
Property and equipment are summarized as follows at December 31, 1999 and 2000
(in thousands):
1999 2000
------ ------
Equipment $1,676 $2,016
Furniture and fixtures 287 388
------ ------
1,963 2,404
Less accumulated depreciation 1,124 1,510
------ ------
Property and equipment, net $ 839 $ 894
====== ======
Long-Lived Assets
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," the Company evaluates the carrying value
of property and equipment in relation to the operating performance and future
undiscounted cash flows of the underlying business. The Company adjusts the net
book value of the underlying assets if the sum of expected future cash flows is
less than book value. Management believes that the long-lived assets in the
accompanying balance sheets are appropriately valued.
Patent Costs
Costs incurred in filing, prosecuting, and maintaining patents are
expensed as incurred. Such costs aggregated approximately $496,000, $608,000,
and $550,000 in 1998, 1999, and 2000.
Accrued Liabilities
Accrued liabilities are summarized as follows at December 31, 1999
and 2000 (in thousands):
1999 2000
------ ------
Accrued compensation $ 379 $ 622
Accrued royalties 23 182
Other accrued expenses 506 458
------ ------
Accrued liabilities $ 908 $1,262
====== ======
Revenue Recognition
The Company records revenue from product sales upon shipment of
the product to the customer.
Revenue from collaborative research and development agreements is
recorded when milestones have been met. Periodic license fee
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42
payments under collaborative agreements related to future performance are
deferred and recognized as income when earned.
The Company's revenue recognition policies are consistent with the
guidance in Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements."
Research and Development
Research and development expenses consist of expenditures for
research conducted by the Company and payments made under contracts with
consultants or other outside parties. All research and development costs are
expensed as incurred.
Income Taxes
Income taxes are accounted for under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Net Loss Per Share
The calculation and presentation of net loss per share are in
accordance with SFAS No. 128, "Earnings Per Share." Basic earnings per share are
based on the weighted average number of shares outstanding. Diluted earnings per
share are based on the weighted average number of shares outstanding and the
dilutive effect of common stock equivalent shares ("CSEs") issuable on the
conversion of convertible preferred stock (using the if-converted method) and
stock options and warrants (using the treasury stock method). For all periods
presented, CSEs have been excluded from weighted average shares outstanding, as
their impact was antidilutive.
Fair Value of Financial Instruments
The book values of cash, trade accounts receivable, trade accounts
payable, and other financial instruments approximate their fair values
principally because of the short-term maturities of these instruments. The fair
value of the Company's collaborative partner advance is estimated based on the
current rates offered to the Company for debt of similar terms and maturities.
Under this method, the fair value of the Company's collaborative partner advance
was not significantly different than the stated value at December 31, 1999 and
2000.
Comprehensive Income
The Company has adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which establishes new rules for the reporting and display
of comprehensive income and its components; however, the Company has no other
comprehensive income items as defined in SFAS No. 130.
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43
New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," in June
1998, SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of the FASB Statement No. 133," in
June 1999 and SFAS No. 138," Accounting for Certain Derivative Instruments and
Certain hedging Activities--an amendment of FASB Statement No. 133," in June
2000. SFAS No. 133 establishes accounting and reporting standards for
derivatives and hedging. It requires that all derivatives be recognized as
either assets or liabilities at fair value and establishes specific criteria for
the use of hedge accounting. SFAS No. 137 defers the effective date of SFAS No.
133 by one year to fiscal years beginning after June 15, 2000. SFAS No. 138
amends the accounting and reporting standards of SFAS No. 133 for certain
derivative instruments and certain hedging activities. The Company's required
adoption date is January 1, 2001. Upon adoption of the three statements, the
Company expects no material impact to its results of operations or financial
position as the Company has no material derivative instruments.
Reclassification
Certain amounts in the December 31, 1998 and 1999 financial
statements have been reclassified to conform to the current year presentation.
3. Investment in FluorRx, Inc.
In December 1996, the Company sublicensed certain technology to
and acquired a 65% interest in FluorRx, Inc. ("FluorRx"), a corporation
organized for the purpose of developing and commercializing technology related
to fluorescence spectroscopy. The Company's interest in FluorRx is represented
by two seats on the board of directors and 1.2 million shares of convertible
preferred stock purchased for $250,000. In December 1997, March 1998, August
1998, and April 1999, FluorRx sold additional convertible preferred stock for
net cash proceeds of $521,000, $429,000, $511,000, and $300,000, respectively.
The issuance of additional preferred stock reduced the Company's ownership (on a
converted basis) to 43%.
For the year ended December 31, 1997, FluorRx incurred an
operating loss of $632,000 which was fully consolidated as the Company
represented FluorRx's sole source of financial support and substantially all the
capital at risk related to investments and advances from the Company. Beginning
with the December 1997 funding and through the August 1998 funding, the Company
consolidated the FluorRx losses, but with appropriate allocations to the
minority shareholders. FluorRx losses recorded by the Company during fiscal 1998
amounted to $306,000. Effective with the August 1998 funding, the Company began
accounting for its investment in FluorRx under the equity method of accounting.
In connection with the change in accounting from consolidation to the equity
method, the Company adjusted its investment in FluorRx to $0, which resulted in
a one-time gain of $635,000. All
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44
FluorRx activity (losses and the one-time gain) is reflected in other (income)
expense in the accompanying statements of operations. The Company has also
suspended recording losses from its investment in FluorRx. Suspended equity
losses amounted to $577,000, $342,000, and $367,000 for the years ended December
31, 1998, 1999, and 2000, respectively. At December 31, 2000, the cumulative
suspended equity loss amounted to $1,500,000.
In 1998, 1999, and 2000, the Company paid certain patent
maintenance and minimum royalty costs amounting to $57,000, $80,000, and
$226,000, respectively, related to technology owned by the Company and
sublicensed to FluorRx. These costs have been expensed as paid.
4. Stockholders' Equity
Common Stock
On February 23, 2000, the Company completed a private placement of
400,000 shares of common stock. The shares were sold for $12.50 per share
resulting in proceeds of $5,000,000. The Company incurred issuance costs of
$197,000 which is presented as a reduction of proceeds in the accompanying
statements of stockholders' equity.
During the year ended December 31, 2000, the Company issued 5,862
shares of common stock in satisfaction of minimum royalty payments amounting to
$60,055 related to the Company's exclusive rights to certain licensed
technology.
Preferred Stock
In January 1997, the Company authorized 5,000,000 shares of
preferred stock with a $.001 par value. The board of directors has the authority
to issue these shares and to fix dividends, voting and conversion rights,
redemption provisions, liquidation preferences, and other rights and
restrictions.
In November 1999, the board of directors designated 525,000 shares
of the preferred stock as redeemable convertible preferred stock. Dividends are
payable annually in cash or securities at a rate of 6% per annum. During the
years ended December 31, 1999 and 2000, the Company paid dividends in the form
of redeemable convertible preferred stock of $14,000 and $315,000, respectively.
The preferred shares, together with any accrued but unpaid dividends, are
convertible into common shares at the greater of $9.388 per share or the average
of the closing sales price for 15 days prior and 15 days subsequent to the
conversion and automatically convert on December 31, 2004 at the then conversion
rate. The shares are mandatorily redeemable at $10 per share, plus accrued but
unpaid dividends, at the later of September 30, 2002 or 60 days subsequent to
the date upon which the Company gives notice to Abbott of Abbott's right to
redeem the shares (which notice may not be given prior to June 1, 2002).
Additionally, the Company may redeem the shares upon receiving a conversion
notice. The shares have a liquidation preference of $10 per share, plus all
accrued but unpaid dividends.
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In November 1999, Abbott subscribed to 525,000 shares of
Redeemable Convertible Preferred Stock for consideration of $5,250,000 of which
$2,750,000 was received in November 1999 and $2,500,000 was received in January
2000.
Conversion of Subordinated Promissory Notes
In June 1996, the Company issued an 8% convertible subordinated
promissory note for $250,000. In June 1998, the holder of the note converted
outstanding principal and interest into 82,637 shares of common stock at a
conversion rate of $3.50.
Stock Options
In May 1995, the Company adopted the 1995 Stock Option Plan (the
"Plan") (as amended), under which 1,428,572 shares of common stock are
authorized and reserved for use in the Plan. During the year ended December 31,
2000, the Company's board of directors amended the Plan by increasing the number
of shares authorized and reserved for use in the Plan by 500,000 shares of
common stock. The Plan allows the issuance of incentive stock options,
nonqualified stock options, and stock purchase rights. The exercise price of
options is determined by the Company's board of directors, but incentive stock
options must be granted at an exercise price equal to the fair market value of
the Company's common stock as of the grant date. Options generally become
exercisable over four years and expire ten years from the date of grant. At
December 31, 2000, options to purchase 250,731 shares of common stock were
available for future grant under the Plan.
Stock option activity for each of the three years ended December 31, 2000 is as
follows:
WEIGHTED
AVERAGE
NUMBER OF PRICE PER
OPTIONS SHARE
--------- ---------
Outstanding, December 31, 1997 1,065,641 $ 3.34
Granted 121,000 6.43
Exercised (169,472) 0.22
Canceled (44,256) 3.69
---------
Outstanding, December 31, 1998 972,913 4.25
Granted 204,500 7.59
Exercised (31,130) 2.65
Canceled (31,774) 6.51
---------
Outstanding, December 31, 1999 1,114,509 4.82
Granted 398,500 11.04
Exercised (36,712) 3.05
Canceled (46,237) 9.92
---------
Outstanding, December 31, 2000 1,430,060 6.47
=========
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The following table sets forth the range of exercise prices, number of
shares, weighted average exercise price, and remaining contractual lives by
groups of similar price as of December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -----------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
NUMBER AVERAGE CONTRACTUAL NUMBER AVERAGE
RANGE OF EXERCISE PRICES OF SHARES PRICE LIFE OF SHARES PRICE
- ------------------------ --------- -------- ----------- --------- --------
$ 0.21-$0.70 356,077 $0.55 5.19 years 356,077 $ 0.55
$ 2.45-$4.13 88,573 2.92 6.42 81,281 2.81
$ 5.13-$9.00 640,910 7.59 7.58 377,346 7.52
$10.25-$16.50 344,500 11.40 9.36 52,581 11.50
Total 1,430,060 6.47 7.34 867,285 4.46
In June 1996, November 1996, and December 1996, the Company granted options to
purchase 269,652, 8,573, and 60,715, respectively, shares of common stock at
exercise prices of $.70, $2.45, and $2.45 per share, respectively. In connection
with the issuance of these options, the Company recognized $304,000 as deferred
compensation for the excess of the deemed value for accounting purposes of the
common stock issuable upon exercise of such options over the aggregate exercise
price of such options. This deferred compensation is amortized ratably over the
vesting period of the options.
The Company has elected to account for its stock-based compensation
plan under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," however, the Company has computed for pro forma disclosure
purposes the value of all options granted in each of the three years ended
December 31, 2000 using the Black-Scholes option pricing model as prescribed by
SFAS No. 123, "Accounting for Stock-Based Compensation," and using the following
weighted average assumptions used for grants in 1998, 1999, and 2000:
1998 1999 2000
------- ------- -------
Risk-free interest rate 5.17% 5.09% 6.05%
Expected dividend yield 0% 0% 0%
Expected lives 4 years 4 years 4 YEARS
Expected volatility 58% 58% 65%
The total values of the options granted during the years ended December
31, 1998, 1999, and 2000 were computed as approximately $437,000, $749,000, and
$1,041,000, respectively, which would be amortized over the vesting period of
the options. If the Company had accounted for these plans in accordance with
SFAS No. 123, the Company's reported net loss and net loss per share for each of
the three years ended December 31, 2000 would have increased by the following
pro forma amounts (in thousands, except per share amounts):
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47
1998 1999 2000
-------- -------- --------
Net loss available to common stockholders:
As reported $ (6,637) $ (6,552) $ (6,662)
SFAS No. 123 Pro forma (7,226) (7,315) (7,703)
Basic and diluted net loss per share:
As reported $ (0.84) $ (0.82) $ (0.79)
SFAS No. 123 Pro forma (0.91) (0.91) (0.91)
Employee Stock Purchase Plan
In 1997, the Company adopted an employee stock purchase plan
under which the Company may issue up to 214,286 shares of common stock. Eligible
employees may use up to 10% of their compensation to purchase, through payroll
deductions, the Company's common stock at the end of each plan period for 85% of
the lower of the beginning or ending stock price in the plan period. At December
31, 2000, there were 176,627 shares available for future issuance under this
plan.
5. Income Taxes
The Company has incurred net operating losses ("NOLs") since
inception. As of December 31, 2000, the Company had net operating loss
carryforwards of approximately $30,117,000 available to offset its future income
tax liability. The NOL carryforwards begin to expire in 2007. The Company has
recorded a valuation allowance for all NOL carryforwards. Utilization of
existing NOL carryforwards may be limited in future years if significant
ownership changes have occurred.
Components of deferred tax assets are as follows at December 31,
1999 and 2000 (in thousands):
1999 2000
-------- --------
NOL carryforwards $ 9,256 $ 11,444
Valuation allowance (9,256) (11,444)
-------- --------
Deferred tax assets $ 0 $ 0
======== ========
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6. Commitments and Contingencies
Operating Leases
Future minimum rental payments at December 31, 2000 under
noncancellable operating leases for office space and equipment are as follows
(in thousands):
2001 $252
2002 251
2003 158
2004 58
2005 24
Rental expense was $261,000, $225,000, and $360,000 in 1998, 1999, and
2000, respectively.
Litigation and Claims
The Company has been subject to certain asserted and unasserted
claims, as described below, against certain intellectual property rights owned
and licensed by the Company. A successful claim against intellectual property
rights owned or licensed by the Company could subject the Company to significant
liabilities to third parties, require the Company to seek licenses from third
parties, or prevent the Company from selling its products in certain markets or
at all. In the opinion of management, there are no known claims against the
Company's owned or licensed intellectual property rights that will have a
material adverse impact on the Company's financial position or results of
operations.
Legal Proceedings
In March 2000, the Company filed a Demand for Arbitration of
certain disputes arising under its License Agreement with Altea/NIMCO and a
former officer-employee of SpectRx who is also a principal in Altea/NIMCO. The
Company sought an interpretation of certain portions of the License Agreement
relating to the Company's obligation to assign future intellectual property
rights and seek relief for these and other issues. The Company also asked for
damages related to these and other issues. Altea had sent two letters to the
Company purporting to give notice of material breach of the License Agreement
for Failure to assign certain intellectual property rights to Altea or NIMCO and
to participate in a joint development program and other items. Final arguments
were held October 23, 2000 and a decision was entered on November 7, 2000 and
the Arbitration panel denied the claims for damages by both parties. They also
denied the claims by Altea/NIMCO that SpectRx is required to continue a program
of Joint Development and all claims that SpectRx has breached the License and
Joint Development Agreement. The Panel interpreted the scope of Joint Technology
under the Agreement as requested by Altea and as a result said that two patent
applications should be jointly assigned to Altea. The Panel also resolved a
dispute over stock options in effect at the time Altea/NIMCO principal Jonathan
Eppstein's employment ended at SpectRx. The Panel also denied the claims of
both sides for attorney's fees and expenses of arbitration.
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In December 2000, Altea/NIMCO filed a new Demand for Arbitration
of certain disputes arising under the licensing agreement with SpectRx.
Altea/NIMCO sought to require SpectRx to engage in future agreements with Altea
for joint development, to obtain assignment of additional patents, to have
SpectRx held liable for certain actions by a subcontractor and to receive a
finding that "commercialization" has not occurred. Subsequently, the Company
filed a Motion to Dismiss or Limit Issues for Adjudication. On March 13, 2001,
the Arbitration Panel issued an order dismissing the issue regarding
commercialization filed by Altea/NIMCO.
In August 2000, SpectRx filed a complaint for Declaratory
Judgment against Ampersand Medical Corp. seeking a declaration that SpectRx has
not misappropriated or improperly disclosed any alleged confidential information
or alleged trade secrets disclosed to it by Ampersand. Ampersand subsequently
filed a counter-suit in Illinois against SpectRx alleging that SpectRx had
misappropriated trade secrets belonging to Ampersand. The parties have agreed to
mediation, and the countersuit filed in Illinois by Ampersand will be withdrawn
and refiled in Gwinnett County, Georgia, if mediation is not successful. SpectRx
believes Ampersand's claims are without merit.
Grant
In October 2000, the Company received another grant of $307,000
from the Center's for Disease Control and Prevention ("CDC") to adapt our
glucose monitoring technology to monitor blood sugar levels of children and
elderly people with diabetes. The funding will be used to conduct clinical
studies, research ergonomic issues and to assist in developing a plan for
regulatory approval of the technology for children and the elderly. The grant
announcement represents a commitment of more than $600,000 in funding to date
from the CDC.
7. Related-Party Transactions
In connection with a June 1994 sale of restricted stock, the
Company loaned two officers of the Company $48,000, of which $31,000 is
outstanding at December 31, 2000. These loans are secured by common stock of the
Company held by the officers, bear interest at 6% per annum, and become payable
on December 31, 2001. Outstanding balances are classified as a reduction of
stockholders' equity in the accompanying balance sheets.
In October 1996, the Company loaned two officers a total of
$400,000. The loans are secured by common stock of Laser Atlanta Optics, Inc.
("LAO") and Company shares of common stock. The Company and LAO are related
through a common group of shareholders. The loans bear interest at 6.72% per
annum and are due and payable in cash in October 2001. However, it is
management's intention not to call the notes in 2001. Outstanding balances are
reflected as due from related parties in the accompanying balance sheets.
8. License and Technology Agreements
As part of the Company's efforts to conduct research and
development activities and to commercialize potential products, the Company,
from time to time, enters into agreements with certain organizations and
individuals that further those efforts but also obligate the Company to make
future minimum payments or to remit royalties ranging from 1% to 3% of revenue
from the sale of commercial products developed from the research.
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50
The Company generally has the option not to make required
minimum royalty payments, in which case the Company loses the exclusive license
to develop applicable technology. Minimum required payments to maintain
exclusive rights to licensed technology are as follows at December 31, 2000 (in
thousands):
2001 $1,135
2002 1,463
2003 1,483
2004 1,502
2005 1,522
During 1998, 1999, and 2000, the Company incurred royalty expenses of $188,000,
$423,000, and $813,000, respectively.
Additionally, the Company is obligated to obtain and maintain
certain patents, as defined by the agreements.
9. Collaborative Agreements
The Company has entered into collaborative research and
development agreements (the "Agreements") with collaborative partners for the
joint development, regulatory approval, manufacturing, marketing, distribution,
and sales of products. The Agreements generally provide for nonrefundable
payments upon contract signing and additional payments upon reaching certain
milestones with respect to technology.
Abbott
The Abbott Agreement, as amended, requires Abbott to make
milestone payments based on progress achieved, to remit royalties to the Company
based on net product sales, and to reimburse certain direct expenses incurred by
the Company in connection with the development of glucose monitoring products.
Reimbursed expenses of $1,260,000, $39,000, and $827,000 for the years ended
December 31, 1998, 1999, and 2000, respectively, have been netted with research
and development expenses in the accompanying statements of operations.
The Company recorded revenues of $500,000 during 1997 related to
the achievement of a milestone. Additionally, in 1997, Abbott purchased
$3,000,000 of Series C preferred stock and in November 1999, subscribed to
$5,250,000 of redeemable convertible preferred stock (Note 4).
Welch Allyn
The Welch Allyn agreement requires Welch Allyn to share equally
the operating expenses and cost of capital assets, to make milestone payments
based on progress achieved, and to pay the Company a technology access fee.
Reimbursed expenses of $250,000, $524,000, and $987,000 for the years ended
December 31, 1998, 1999, and 2000, respectively, have been netted with research
and development expenses
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in the accompanying statements of operations. Welch Allyn will have the
exclusive rights to manufacture and supply the cervical cancer detection system
product with the exception of a certain module. The parties have agreed to enter
into a joint venture for purposes of carrying out our commercialization of the
cervical product. The Company recorded revenues of $250,000, $700,000, and $0
during 1998, 1999, and 2000, respectively, related to the achievement of certain
milestones.
At December 31, 1999, a receivable from Welch Allyn represented 74
% of accounts receivable. The balance due was paid in January 2000.
Roche
The Roche agreement requires Roche to make milestone payments
based on progress achieved and to purchase diabetes screening products
manufactured by the Company at a predetermined profit margin, subject to
renegotiation between the parties in certain instances. During 1998, 1999, and
2000, the Company recorded $0, $987,000, and $124,000, respectively, in revenues
related to the achievement of certain milestones.
In July 1999, the Company received $381,000 in advance payments
for inventory components with long lead times from Roche. The balance is
noninterest bearing and is due upon the date in which Roche has received
delivery of 250 diabetes screening devices pursuant to the Roche agreement and
Federal Drug Administration Regulatory clearance has been issued.
Respironics
The Respironics agreement requires Respironics to make milestone
payments based on progress achieved and to purchase infant jaundice products
manufactured by the Company at a predetermined profit margin, subject to
renegotiation between the parties in certain instances. The Company recorded
revenues of $275,000, $200,000, and $125,000 in 1998, 1999, and 2000,
respectively, related to the achievement of certain milestones. Additionally,
Respironics purchased products amounting to $191,000, $364,000, and $479,000
during 1998, 1999, and 2000, respectively, from the Company.
10. Business Segment Information
The Company operates in one business segment, the research and
development of products that offer less invasive and painless alternatives to
blood tests currently used for glucose monitoring, diabetes screening, cervical
cancer detection, and infant jaundice. The Company had no product sales prior to
fiscal year 1998. During fiscal years 1998, 1999, and 2000, total product
revenues of $823,000, $1,440,000, and $2,219,000, respectively, related
primarily to the Company's infant jaundice product. The Company has licensed the
right to distribute the infant jaundice product within the United States and
Canada to Respironics. The Company distributes the product outside the
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52
United States and Canada through a diverse group of foreign distributors. All
sales are payable in United States dollars. Product revenues attributable to
countries based on the location of the customer are as follows (in thousands):
1998 1999 2000
------ ------ ------
Europe $ 480 $ 566 $ 687
United States and Canada 191 364 837
Mexico 4 209 135
Middle East 64 154 54
Far East 39 81 400
Other 45 66 106
------ ------ ------
Total $ 823 $1,440 $2,219
====== ====== ======
Because all product revenues are derived from the sale of U.S.-produced
product, the Company has no significant long-lived assets located outside the
United States.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the registrant will file a definitive proxy statement within
120 days after the end of the fiscal year covered by this Report pursuant to
Regulation 14A relating to the registrant's 2001 Annual Meeting of Stockholders
to be held on May 23, 2001, and certain information included therein is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the captions "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" in our proxy statement is
hereby incorporated by reference.
Our executive officers are elected by and serve at the discretion of
our board of directors. The following table lists information about our
executive officers as of February 28, 2001:
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NAME AGE POSITION
---- --- --------
Mark A. Samuels 42 Chairman, chief executive officer and
director
Keith D. Ignotz 53 President, chief operating officer and
director
Thomas H. Muller, Jr. 59 Executive vice president, chief
financial officer and secretary
Mark L. Faupel 45 Vice president, research & development
Richard L. Fowler 44 Vice president, technology assessment
Robert G. Rothfritz 51 Vice president, operations
Except as set forth below, all of the executive officers have been
associated with us in their present or other capacities for more than the past
five years. Officers are elected annually by the board of directors and serve at
the discretion of the board. There are no family relationships among our
executive officers.
Mark A. Samuels has served as a member of our board of directors and
chief executive officer since co-founding SpectRx in 1992. Prior to that time,
Mr. Samuels was a founder of Laser Atlanta Optics, Inc., an optical sensor
company, where he held the position of president and chief executive officer
until 1992, and was a director until October 1996. While at Laser Atlanta
Optics, Mr. Samuels focused on the development of commercial and medical
applications of electro-optics. Mr. Samuels earned a B.S. in Physics and an M.S.
(Electrical Engineering) from Georgia Institute of Technology.
Keith D. Ignotz has served as a member of our board of directors and
chief operating officer since co-founding SpectRx in 1992. Formerly, Mr. Ignotz
was president of Humphrey Instruments SmithKline Beckman (Japan), president of
Humphrey Instruments GmbH (Germany), and senior vice president of Allergan
Humphrey Inc., a $100 million per year ophthalmic diagnostic company. Mr. Ignotz
is a member of the board of directors of Vismed, Inc. (Dicon), an ophthalmic
diagnostic products company, and Pennsylvania College of Optometry. Mr. Ignotz
earned a B.A. in Sociology from San Jose State University and an M.B.A. from
Pepperdine University.
Thomas H. Muller, Jr. has served as our chief financial officer since
joining us in December 1996. Prior to that time, Mr. Muller was president of
Muller & Associates, an operational and financial management services company
and chief financial officer of Nurse On Call, Inc. From 1984 to 1992, Mr. Muller
was chief financial officer of HBO & Company, a provider of information systems
and services to the health care industry. Mr. Muller is a member of the board of
directors of NetBank, Inc., an internet banking company. Mr. Muller earned a
B.I.E. in Industrial Engineering from Georgia Institute of Technology and an
M.B.A. from Harvard Business School.
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54
Mark L. Faupel, Ph.D. has served as our vice president of research
and development since August 1998. Dr. Faupel joined us on February 2, 1998 in
the capacity of vice president, new product development. Prior to that time, Dr.
Faupel was an independent consultant to us and other firms in cancer research.
From 1987-1997, Dr. Faupel held various positions with Biofield Corporation, a
medical device company in the area of breast cancer detection, a firm which he
co-founded and served as vice president, director of science and vice president,
research and development.
Richard L. Fowler has served as our vice president of technology
assessment since August 2000 and our vice president of engineering since joining
us in February 1996. Prior to that time, Mr. Fowler worked for Laser Atlanta
Optics, Inc., where he held the positions of president and chief executive
officer from August 1994 to February 1996. As vice president of engineering for
Laser Atlanta Optics from 1992 to 1994, Mr. Fowler managed the development of
three laser sensor products. Mr. Fowler earned a B.S. in Electrical Engineering
from University of Texas.
Robert G. Rothfritz, has served as our vice president of operations
since joining us in July 1996. From 1994 to 1996, Mr. Rothfritz was director of
manufacturing for Atlantic Envelope Company, a National Service Industries, Inc.
division, and from 1993 to 1994, he was a senior manager, manufacturing systems
leader for Ethicon EndoSurgery, a Johnson & Johnson division. From 1988 to 1992,
Mr. Rothfritz was vice president, operations for the Oral Care Division of
Bausch & Lomb, Inc. Mr. Rothfritz earned a B.S. in Mechanical Engineering from
Georgia Institute of Technology.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Election of Directors - Director
Compensation" and "- Compensation Committee Interlocks and Insider
Participation" and "Executive Compensation" in our proxy statement is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Share Ownership of Directors,
Officers and Certain Beneficial Owners" in our proxy statement is hereby
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Transactions" in our proxy
statement is hereby incorporated by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) The following documents are filed as a part of this Report:
1. FINANCIAL STATEMENTS
Report of Independent Public Accountants
Balance Sheets as of December 31, 1999 and 2000
Statement of Operations for the Years Ended
December 31, 1998, 1999 and 2000
Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1999 and
2000
Statements of Cash Flows for the Years Ended
December 31, 1998, 1999 and 2000
Notes to Financial Statements
2. FINANCIAL STATEMENT SCHEDULE.
Schedules are not included in this Annual Report on Form 10-K,
as they are not required or the information required to be set
forth therein is included in the Consolidated Financial
Statements or Notes thereto.
3. EXHIBITS
Refer to (c) below.
(B) REPORTS ON FORM 8-K
We were not required to and did not file any Current Reports
on Form 8-K during the quarter ended December 31, 2000.
(C) EXHIBITS
The exhibits listed on the accompanying Index to Exhibits are
filed as part hereof, or incorporated by reference into, this
Report.
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1A(2) Certificate of Incorporation, as amended.
3.1B(7) Certificate of Designations for Redeemable Convertible
Preferred Stock.
3.2A(1) Bylaws.
3.2B(7) Amendment to Bylaws.
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 SpectRx.
10.4(1) Stock Purchase Agreement, dated June 30, 1994, between Keith D.
Ignotz and SpectRx.
10.5(1) Assignment and Bill of Sale, dated February 29, 1996, between
Laser Atlanta Optics, Inc. and SpectRx.
10.6(1) Security Agreement, dated October 31, 1996, between Mark A.
Samuels and SpectRx.
10.7(1) Security Agreement, dated October 31, 1996, between Keith D.
Ignotz and SpectRx.
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 SpectRx.
10.11C(1) First Amendment to License Agreement, dated October 19,
1993, between Georgia Tech Research Corporation and SpectRx.
10.12(1) Clinical Research Study Agreement, dated July 22, 1993, between
Emory University and SpectRx.
10.13A(1)* Development and License Agreement, dated December 2,
1994, between Boehringer Mannheim Corporation and SpectRx.
10.13B(1)* Supply Agreement, dated January 5, 1996, between Boehringer
Mannheim and SpectRx.
10.14(1) Sponsored Research Agreement, No. SR95-006, dated May 3, 1995,
between University of Texas, M.D. Anderson Cancer Center and SpectRx.
10.15(1) Sole Commercial Patent License Agreement, dated May 4, 1995,
between Martin Marietta Energy Systems, Inc. and SpectRx.
10.16A(1) License Agreement, dated November 22, 1995, between Joseph R.
Lakowicz, Ph.D. and SpectRx.
10.16B(1) Amendment of License Agreement, dated November 28, 1995, between
Joseph R. Lakowicz, Ph.D. and SpectRx.
10.16C(1) Second Amendment to License Agreement, dated March 26, 1997,
between Joseph R. Lakowicz, Ph.D. and SpectRx.
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57
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.16D(4) Third Amendment to License Agreement, dated November 20, 1998,
between Joseph R. Lakowicz, Ph.D. and SpectRx.
10.16E(4)** Fourth Amendment to License Agreement, dated November 20, 1998,
between Joseph R. Lakowicz, Ph.D. and SpectRx.
10.17(1) License and Joint Development Agreement, dated March 1, 1996,
between NonInvasive-Monitoring Company, Inc., Altea Technologies,
Inc. and SpectRx.
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 SpectRx.
10.19A(1)* Purchasing and Licensing Agreement, dated June 19, 1996, between
Respironics and SpectRx.
10.19B(4)* Amendment to Purchasing and Licensing Agreement, dated October
21, 1998 between Respironics and SpectRx.
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 SpectRx.
10.21A(1)* Research and Development and License Agreement, dated
October 10, 1996, between Abbott Laboratories and SpectRx.
10.21B(3)* Letter Agreement, dated December 22, 1997, between Abbott
Laboratories and SpectRx.
10.21C(6)* Third Amendment to Research and Development and License
Agreement, dated November 30, 1999 between Abbott Laboratories
and SpectRx.
10.22A(1) Lease, dated September 21, 1993, between National Life
Insurance Company d/b/a Plaza 85 Business Park and SpectRx,
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 SpectRx.
10.25A(5)* Development and License Agreement, dated July 13, 1999,
between Roche Diagnostics Corporation and SpectRx.
10.25B(5)* Supply Agreement, dated July 13, 1999, between Roche
Diagnostics Corporation and SpectRx.
11.1(7) Calculation of earnings per share.
23.1(7) Consent of Arthur Andersen LLP.
24.1 Power of Attorney (included at signature page.)
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58
- -------------------
* Confidential treatment granted for portions of these agreements.
(1) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form S-1 (No. 333-22429) filed February 27,
1997, and amended on April 24, 1997, June 11, 1997, and June 30, 1997,
which Registration Statement became effective June 30, 1997.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 filed
August 12, 1997.
(3) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997, filed
March 27, 1998.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10K for the year ended December 31, 1998, filed
March 30, 1999, as amended.
(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,as amended.
(6) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1999, filed
March 30, 2000, as amended.
(7) Filed herewith.
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59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Norcross, State of Georgia, on the 30th day of March 2001.
SPECTRX, INC.
By: /s/ MARK A. SAMUELS
---------------------------------------
Mark A. Samuels
Chairman and Chief Executive Officer
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Mark A. Samuels and Thomas H.
Muller, Jr., jointly and severally, his or her attorneys-in-fact, and each with
the power of substitution, for him or her in any and all capacities, to sign any
amendments to this Annual Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
DATE SIGNATURE TITLE
- -------------- -------------------------- -------------------------------------
March 30, 2001 /s/ Mark A. Samuels Chairman, Chief Executive Officer and
-------------------------- Director (Principal Executive Officer)
Mark A. Samuels
March 30, 2001 /s/ Thomas H. Muller, Jr. Executive Vice President and Chief
-------------------------- Financial Officer (Principal Financial
Thomas H. Muller, Jr. and Accounting Officer)
March 30, 2001 /s/ Keith D. Ignotz President, Chief Operating Officer
-------------------------- and Director
Keith D. Ignotz
March 30, 2001 /s/ Charles G. Hadley Director
--------------------------
Charles G. Hadley
/s/ Earl R. Lewis
March 30, 2001 -------------------------- Director
Earl R. Lewis
March 30, 2001 /s/ William E. Zachary Director
--------------------------
William E. Zachary
March 30, 2001 /s/ Chris Monahan Director
--------------------------
Chris Monahan
Page 21