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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, 2001.
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 $58 million as of February 28, 2002, 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, 2002, the Registrant had outstanding 11,201,951
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 2002 Annual
Meeting of Stockholders -- Items 10, 11, 12 and 13.
PART I
ITEM 1. BUSINESS
OVERVIEW
We are a medical technology company developing and providing products
for the diabetes and non-invasive diagnostics markets. We use our leading-edge
technologies to provide:
- minimally invasive blood sampling procedures for the
monitoring of glucose levels in people with diabetes;
- innovative insulin delivery products; and
- painless, non-invasive alternatives to blood and tissue
sampling procedures, primarily for detection of various
topical cancers and infant jaundice.
Our technology has historically been based upon biophotonic technology.
Biophotonic technology is the use of light and other forms of energy to access
the human body to diagnose and monitor disease. In addition, we have recently
expanded our technology to include innovative methods of delivering insulin to
people with diabetes with our acquisition of Sterling Medivations, Inc. in
December 2001. We now have two areas of focus: diabetes management products and
non-invasive diagnostic products.
Within our diabetes management business, we are developing products
that measure glucose levels more conveniently and more often than similarly used
products currently sold by our competitors. Additionally, our insulin delivery
products in development are designed to deliver insulin more comfortably and
effectively than competing products.
In our non-invasive diagnostic business, we market a product
that we developed 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 cancer detection. We believe the
products in these areas 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.
Significant portions of our activities have been done in collaboration
with other, larger companies. We have relied on these collaborative partners for
a significant amount of funding for product development. In some cases, we will
rely on these collaborative partners to distribute and market the products we
are developing.
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 focus our business
activities on our current products and near term product
introductions to maximize stockholder value. We plan to
introduce in the third quarter of 2002 a line of new products
in the insulin delivery marketplace. We will also continue to
work to advance our products under development towards
commercialization. We intend to implement this strategy by:
- finalizing production ramp-up of our first series of
insulin delivery products;
- expanding our sales and marketing activities;
- leveraging the expertise of our collaborative
partners;
- seeking clearance for our products where necessary
from the United States Food and Drug Administration,
or FDA;
- focusing and streamlining our internal product
development capabilities; and
- continuing our development of a distribution channel
for our diabetes management products, which we began
by establishing relationships with distributors and
original equipment manufacturers in various segments
of the insulin delivery product market. These
channels will serve our insulin infusion product
offerings that we will initially introduce, as well
as future product offerings in this area.
- Develop Additional Products. We need to ensure a future
product pipeline. We intend to leverage our proprietary
technologies to develop additional products from our current
products and our other product development activities. We
believe that our development activities in diabetes management
and cancer detection have significant promise for additional
product offerings. The interstitial fluid sampling technology
we have developed in this area may be applicable for
monitoring compounds other than glucose and that our insulin
delivery products may be used to deliver other drugs or
compounds. We also believe that the technology used in the
cancer detection products we are developing can be used for
the detection of other cancers.
- Address Large Market Opportunities. We believe that large
market opportunities exist for products using our proprietary
technologies. We intend to address these opportunities by
selectively developing future products that incorporate a
disposable component and qualify for third-party
reimbursement.
- Collaborate with Market Leaders. We have established
collaborative arrangements with Abbott Laboratories,
Respironics, Inc., Welch Allyn, Inc. and Roche Diagnostics BMC
to develop and commercialize many of 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.
INDUSTRY OVERVIEWS
DIABETES MANAGEMENT
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 to 300 million people worldwide 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 U.S. 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,
although it can eventually require injection of insulin.
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 individuals without diabetes.
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 worldwide 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, as described below, 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.
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
to obtain an accurate result.
Our glucose monitoring products use our microporation technology to
collect a sample of interstitial fluid. 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. The interstitial fluid sample
obtained from the micropore 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.
The primary focus of our collaboration with Abbott is currently on the
continuous monitoring product, and we are independently developing 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 attaching the meter to the patch 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.
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. From 1996 through August 1998, Abbott
reimbursed us for development costs associated with the program.
In November 1999, Abbott and we entered into an amendment of the
collaborative arrangement. 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 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.
In April 2001, Abbott assumed financial responsibility for development
costs of the continuous glucose monitor. Previously, Abbott and we had shared in
the costs. As a result, Abbott reimburses us for development costs associated
with the continuous glucose monitoring program.
In September 2001, we further amended our agreement with Abbott and
announced we were to receive a $1,000,000 milestone payment from Abbott in the
form of a purchase of common stock in connection with a Program Development
Notice. The amendment provided for Abbott to move forward with commercialization
of the continuous monitoring product and to grant rights back to us to
independently develop the single use application of the technology. Abbott also
agreed to reduce the amount eligible for redemption by $1,000,000 of the
original $5,250,000 in convertible redeemable preferred stock.
In October 2001, we announced receipt of a third grant of $338,000
from the U.S. Centers for Disease Control and Prevention. We have now received
nearly $1.0 million in funding to adapt our glucose monitoring technology to
monitor blood sugar levels of children and elderly people with diabetes.
Our research and development is focused on the integration of our
microporation, fluid management and 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.
As described above, our collaborative agreement with Abbott was amended
in November 1999 and in September 2001, and we are currently working
independently of Abbott to develop the single use application of our
interstitial fluid sampling technology.
Insulin Delivery Market
Of the estimated 100 million people with diabetes worldwide, including
16 million in the U.S., approximately 5-10% have Type I diabetes. Of the
remaining people with diabetes, about 35% use insulin periodically to manage
their condition. It is estimated that between 2.5 to 3.0 million individuals
with Type II diabetes in the U.S. use insulin on a regular basis.
Currently, the most common means of insulin delivery are syringe,
insulin pen and insulin pump. Approximately 92% of the people who use insulin in
the U.S. use the syringe, 6% use the pen and 2% use the pump. Variances in the
cost of supplies and varying degrees of insulin dependency affect the worldwide
market for each of these products, which we believe is about $500 million for
syringes, growing at 5% per year, $250 million for insulin pens and pre-filled
syringes, growing at 30% per year, and $500 million for pumps, which includes
$300 million for devices and $200 million for disposable components and is
growing at 25% per year.
Infusion sets attach to the insulin pump and transport the insulin
through tubing to a catheter that is inserted under the skin, where it is
absorbed into the tissue. Infusion sets are generally used for about three days
and discarded. A new infusion set is inserted under the skin at a different
location and attached to the pump to continue treatment for another three days.
We estimate the insulin pump infusion set market at about $200,000,000 annually
in the U.S. Consumers generally purchase infusion sets from the pump
manufacturer, distributors or durable medical equipment sellers. The average
insulin pump user consumes about $1,300 annually in disposable supplies.
Our Insulin Delivery Products
On December 31, 2001, we began to enter the insulin delivery market
with the acquisition of Sterling Medivations. Sterling Medivations, a start-up
medical device company, has developed a line of FDA-cleared insulin delivery
products. Sterling Medivations was acquired by the merger of a newly formed,
wholly-owned subsidiary of SpectRx with and into Sterling Medivations. As a
result of the merger and following adjustments to the shares initially issued,
we issued approximately 610,000 shares of our common stock to former
stockholders of Sterling Medivations. We also agreed to assume the existing
stock option plan of Sterling Medivations, and if all assumed stock options were
exercised, we would be required to issue approximately 22,000 additional shares
of our common stock to former holders of options to purchase Sterling
Medivations common stock. The number of shares issued or reserved in connection
with the merger is subject to further adjustment. Up to an aggregate of
approximately 1.2 million additional shares of our common stock could be issued
to former stockholders or reserved for issuance to former option holders of
Sterling Medivations, if the products developed by Sterling Medivations meet
specified financial goals. The closing sales price for a share of our common
stock on December 31, 2001 was $6.90, which, based on the shares of our common
stock issued or reserved for issuance in connection with the merger, initially
values the transaction at approximately $4.3 million.
The products under development we acquired in the merger include
insulin pump infusion sets, an insulin pen and other ancillary insulin delivery
products. Since the acquisition, we have received FDA clearance for two
additional products, bringing to 19 the number of acquired products with U.S.
regulatory approval.
We expect to begin marketing the first of these products in the third
quarter of 2002, followed by additional product launches in coming years. The
initial products will be insulin pump infusion sets, trademarked Simple Choice.
Our Simple Choice insulin pump infusion sets are designed to compete with
existing infusion sets. Our product contains innovations and additional
features, which we believe consumers will prefer over their existing insulin
infusion sets. The features and benefits of our product include its:
- compatibility with all major insulin pump brands;
- 360 degree rotating hub for increased comfort through better
flexibility and movement;
- tapered catheter for easier insertion;
- newly designed connection mechanism for quick removal; and
- improved needle tip for less painful insertion.
Our first insulin pump infusion set product is expected to be the
Simple Choice Easy. This product is a 30-degree insertion infusion set designed
to work with all major brands of insulin pumps on the market today. Our second
insulin pump infusion set product is expected to be the Simple Choice Quick.
This product is a 90-degree insertion infusion set designed to work with all
major brands of insulin pumps. The "Quick" will also feature a 360-degree
rotating hub, which will allow the wearer more freedom of movement and greater
flexibility.
Another product in the Simple Choice product line is an insulin
infusion patch. The patch is designed with microneedle technology to reduce pain
and improve comfort over existing infusion sets. The microneedles in the patch
penetrate the skin about 2.5 mm, as compared to up to 9 mm for conventional
infusion sets.
In addition to insulin sets, the Simple Choice product line is expected
to include insulin pens, reservoirs and insertion devices. Initially, we expect
to sell our products through distributors and durable medical equipment sellers.
We also ultimately plan to make our products more widely available than infusion
sets available from other manufacturers by
expanding our distribution channels, which will provide our customers with
easier access to our products.
NON-INVASIVE DIAGNOSTICS BUSINESS
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 Detection 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 measurable 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
BiliCheck in Europe. In April 1998, we began selling BiliCheck units to
international distributors. The BiliCheck is currently being marketed in more
than 60 countries worldwide. In March 1999, the BiliChek received clearance from
the FDA for Respironics to market the product in the U.S., which began after
Respironics obtained the initial FDA clearance. In 2001, we sold 375 BiliChek
units to Respironics for sales in the United States and Canada, which was 47% of
total BiliChek shipments. Also in 2001, we sold 67,000 BiliCal units to
Respironics and 336,000 BiliCal units to distributors outside the United States
and Canada.
In November 2000, the BiliChek was approved for third-party
reimbursement in the U.S. under CPT code 88400. In March 2001, the FDA granted
clearance for expanded claims for use of the BiliChek, including use during and
after phototherapy in response to Respironics' initial premarket notification
submission filed in January 2000. In 2001, after the FDA granted clearance for
expanded phototherapy claims for use of BiliChek, Respironics began to implement
a number of activities to increase the marketing effort for the BiliChek in the
U.S.
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 these activities for which it has
responsibility and the amount and quality of financial, personnel and other
resources that it devotes to these activities.
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 may produce ambiguous or
unreliable results. It 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.
Our Non-invasive Cervical Cancer Product
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, is intended to preserve 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 patients included in this
study, 20 had high-grade precancers, 36 had low-grade precancers, 146 had benign
lesions and 116 had 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.
In 2001, a study published in the Journal of Lower Genital Tract
Disease reported that prototypes of our non-invasive cervical cancer detection
device detected 25% more incidences of disease than Pap tests. The study of 111
women, conducted at two U.S. sites, also showed that the performance of the
prototypes was not affected by age, history of childbirth or previous cervical
surgical history and generated results across an age range of 18 to 73 years
old. The data from the examinations of the patients in the study using our
prototypes and Pap tests were compared to colposcopy and biopsy results. The
results showed that our devices were able to distinguish low-grade and
high-grade precancers as well as their locations on the cervix. Of the 111
patients included in the study, 19 had high-grade precancer, 30 had low-grade
precancer, 34 had other diseases or scar tissue and 28 were considered normal.
We continue to work on the development of prototypes for our cervical
cancer detection product. If we are successful in developing a product, we would
then conduct the pivotal clinical trials and make required regulatory
submissions. Unexpected problems, however, may arise
during the development and regulatory approval processes. In addition, we will
seek regulatory approvals for our cervical cancer detection product.
The market for cervical cancer screening is currently dominated by
lab-based cytological screening of samples obtained from patients. The market
for primary screening is dominated by Cytyc, Inc., which announced recently an
agreement to merge with Digene, Inc., which markets another method of cervical
cancer screening, HPV (Human Papilloma Virus) detection. We have conducted
several marketing research programs related to the cervical cancer market and
the impact of the growth of the lab-based cytological screening products. We are
continually reviewing the impact of the changing competitive landscape on our
cancer detection technology. Our evaluation of these market conditions will
determine the pace of our product development. The expenditure of substantial
resources for development of this product will require that we demonstrate
clinical and commercial effectiveness wherein we are able to change current
medical practice behavior and capture substantial market share. Accordingly, we
cannot be sure that these events will occur.
Our Skin Cancer Detection Product
While our current collaborative agreement with Welch Allyn specifically
focuses on the development of a cervical cancer detection product, the agreement
also retains rights for Welch Allyn to expand the relationship with us to
develop and commercialize a skin cancer detection product, should we determine
through research efforts that such an application of the technology is feasible.
To date, we have not undertaken any substantial research and development efforts
with respect to this product.
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, Respironics, Welch Allyn
and Roche. 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.
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.
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 common 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.
In September 2001, Abbott and we entered into another amendment to focus on the
continuous glucose monitoring product and to modify the terms of the redeemable,
convertible preferred stock to reduce the amount eligible for redemption by
$1,000,000 of the original $5,250,000. Because the remaining shares of preferred
stock are still redeemable and convertible, they are classified as mezzanine
level security debt on our balance sheet. If the redeemable preferred stock is
tendered for conversion, we may redeem the shares, at our option. The shares of
preferred stock, together with any accrued but unpaid dividends, are convertible
into common stock at the greater of $9.39 per share or the average of the
closing sales price for the 30 trading day period that begins on the 15th day
prior to our receipt of a conversion notice. The preferred stock automatically
converts on December 31, 2004 at the then conversion rate. The shares are
mandatorily redeemable, except for 100,000 shares, at $10 per share, plus
accrued but unpaid dividends, beginning on December 31, 2002, if we receive a
written notice from the holders of at least a majority of the shares of
preferred stock on or before the later of September 30, 2002 or 60 days
subsequent to the date that we give notice to the holders of the preferred stock
of Abbott's right to redeem the shares. This notice may not be given prior to
June 1, 2002. If this written election to be mandatorily redeemed is made,
one-half less 100,000 shares of the preferred stock are to be mandatorily
redeemed on December 31, 2002, and the remaining one-half on or prior to January
31, 2004, if we achieve a revenue goal of $20 million during the year 2003. If
we do not achieve this goal, then of the shares of preferred stock outstanding,
one-half must be redeemed prior to January 31, 2004, and the balance by December
31, 2004. If converted, Abbott would own 10.4% of our outstanding stock, based
upon shares outstanding on December 31, 2001.
Under the agreement with Abbott as amended, our current focus of
research and development activity with Abbott 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.
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.
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 for noninvasive cervical and skin cancer diagnostic
products. Under the terms of the current 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 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 of the cervical cancer detection product, which triggered a milestone
payment of $700,000. There were no milestone payments earned in 2000 or in 2001.
As a result of changes in the cervical cancer screening market,
including an increasing dominance by Cytyc of the cytological lab-based
screening market and its announced merger with Digene, another large player in
this marketplace, we and Welch Allyn commissioned several marketing research
studies in 2001. These studies were designed to evaluate market acceptance of a
point-of-care, non-invasive test under various positioning strategies. We are
doing additional market research in 2002. We and Welch Allyn have been reviewing
the results of these research studies and discussing various approaches to
product development, market positioning and the continued feasibility of
developing this product together. Pending the results of this market research
and our discussions with Welch Allyn, we will review our development and
commercialization activities with respect to our cervical cancer detection
product as well as our relationship with Welch Allyn.
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 affiliates. Roche is not restricted from pursuing the
development of a diabetes detection instrument with another party.
We entered into a collaborative arrangement with Roche to develop and
commercialize our non-invasive diabetes detection product, trademarked the
Accu-Check D-Tector. Although the performance of this product has been shown to
be comparable to that of blood-based screening tests currently in use, we expect
no revenue from this product in the foreseeable future because we tentatively
agreed with Roche to postpone its market introduction due to rising costs
associated with the development process. We are in the process of finalizing an
amendment to our agreement with Roche pending a determination of the feasibility
of continuing development for diabetes detection product. We do not know when,
if ever, we will commercialize this product.
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, also
referred to as NIMCO. 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 products, the joint
application by us and Altea for a U.S. patent and an international patent
related to the glucose monitoring products. It also outlined continued joint
development efforts between us and Altea, for the first year subject to both
parties' approval. 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.
We and Altea and Non-Invasive Monitoring have arbitrated specified
claims under these agreements as discussed in "Item 3. Legal Proceedings." In
December 2001, we and Altea reached a settlement related to our most recent
arbitration, which amended the agreement with Altea and provided several changes
to the obligations of both parties. Under the settlement, we both agreed to a
process to agree on what is joint technology covered by the agreement, to end
the inclusion of future intellectual property into joint technology, to
eliminate any test for commercialization other than ordinary due diligence and
to modify the scope of royalty payments. As part of the settlement, we agreed to
pay minimum royalties due in 2002 through 2004 in advance during 2002, in
exchange for a reduction in minimum royalties in future years.
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. 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 jointly
owned technology developed prior to the execution of the amended agreement
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.
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, so long as the
agreement stays in force. 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. While we have not historically done research and
development in the area of insulin delivery, we acquired Sterling Medivations,
which has been developing a variety of insulin delivery products. Since
inception to December 31, 2001, we incurred about $27.3 million in research and
development expenses, net of about $10.4 million, which was reimbursed through
collaborative arrangements. Research and development costs were about $5.2
million in 1999, $5.8 million in 2000, and $3.8 million in 2001. Four distinct
groups conduct research, development and engineering. One group consists of
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 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 scientists and engineers focused on the
development of cancer detection products. The fourth group consists of
engineers developing insulin delivery products. In addition, our subsidiary,
Sterling
Medivations, has a development and production agreement with Facet Technologies,
Inc., which provides production engineering services, and it also has a supply
agreement with Facet Technologies.
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.
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, only prototypes of our glucose monitoring, cancer detection
and some insulin delivery products have been tested. Because our research and
clinical development programs are at an early stage and market research is still
being conducted, substantial additional research and development and clinical
trials will be necessary before commercial prototypes of our glucose monitoring
and cancer detection products are produced. Our Simple Choice line of insulin
delivery products is at various stages of development. While significant
progress has been made in development and engineering, considerable additional
effort and expense will be required for commercialization to occur and for
products still in the development pipeline to become ready for commercial
introduction.
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. We have little experience manufacturing products
in the volumes that would be necessary for us to achieve significant commercial
sales. Currently, we employ 17 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 developed and currently manage a distribution system for our
BiliChek product line. In addition, we expect to develop, manage and service
distribution channels for our insulin delivery
products. We have elected to focus much 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.
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, if
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. We gained access to several patent
applications and one granted European patent related to insulin delivery when we
acquired Sterling Medivations on December 31, 2001.
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 insulin
delivery, glucose monitoring and cervical cancer detection in particular, are
intensely competitive. If successful in our product development, we will compete
with other providers of insulin delivery systems, 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, Therasense 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.
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 with us for
a share of the markets in which we introduce products.
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 Cytyc 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. If we develop a cervical cancer detection product,
we will be required 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.
The competition in the insulin delivery business includes existing
manufacturers of insulin meters, which utilize insulin delivery infusion sets
that will compete with our products. The U.S. market for insulin pumps is
dominated by MiniMed, a subsidiary or Medtronic, Inc. In addition, there are
companies that produce and market insulin delivery pens, syringes and other
devices which will compete with our products.
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.
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 non-significant 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.
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.
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. We will also be responsible
for obtaining and maintaining regulatory approvals for some of our products. The
inability or failure 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, 2001, we had 79 employees and consulting or other
contract arrangements with 41 additional persons to provide services to us on a
full- or part-time basis. Of the 120 people so employed or engaged by us, 52 are
engaged in research and development activities, 13 are engaged in sales and
marketing activities, 24 are engaged in clinical testing and regulatory affairs,
17 are engaged in manufacturing and development, and 14 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.
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.
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 integrate the recently acquired operations of
Sterling Medivations and launch our Simple Choice product line 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 $39.3 million at December
31, 2001.
STERLING MEDIVATIONS HAS AN UNPROVEN BUSINESS THAT IS DIFFERENT FROM OUR FORMER
FOCUS ON NON-INVASIVE PRODUCTS, AND WE WILL BE REQUIRED TO DEVELOP NEW
CAPABILITIES TO SUCCESSFULLY INTEGRATE STERLING MEDIVATIONS.
We recently acquired Sterling Medivations, Inc., a start-up medical
device company that has developed a portfolio of diabetes products, in December
2001. Sterling Medivations currently has no revenues or significant assets. The
Simple Choice product line that we acquired with Sterling Medivations is also
significantly different from our existing product line, which focuses on
non-invasive and minimally invasive products. Sterling Medivations's future
business will depend on our ability to develop various functions that will
enable it to operate as planned, including manufacturing, marketing, and
distribution capabilities. There can be no assurance that we or Sterling
Medivations will be able to successfully develop or implement these functions.
We cannot be sure that we will be able to successfully integrate the
Sterling Medivations business into our operations without substantial costs,
delays or other problems. The difficulties of combining operations may be
magnified by integrating personnel with differing business backgrounds and
corporate cultures. The integration of Sterling Medivations may take longer and
be more disruptive to our company than originally anticipated and may result in
a significant diversion of management attention and operational and financial
resources. We and Sterling Medivations may not be able to realize the benefits
that are expected to be realized. Difficulties encountered in the integration
process could have an adverse effect on our business, operations and financial
condition.
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 FOOD AND DRUG ADMINISTRATION'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 Food and Drug Administration, or FDA. We
cannot be sure:
- that we or our collaborative partners 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 as described below; or
- that other significant difficulties and costs will not be
encountered to obtain FDA clearance or approval.
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, Roche 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 have four pre-market
notification applications pending for products in our insulin delivery line. We
do not have any other premarket notifications or premarket approval applications
pending, but we currently believe our cervical 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 any 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 certification 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 SIGNIFICANTLY 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 for
most of our product lines, 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 many of 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 do not have
control over the timing or amount of resources our collaborative partners devote
to these activities.
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, or have rights to, 37 U.S. patents (including
those under license). In addition, we have filed for, or have rights to, 55 U.S.
patents (including those under license) that are still pending. There are
additional international patents and pending applications. 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, infant jaundice
and insulin delivery 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.
MUCH OF OUR FUTURE REVENUES WILL BE DERIVED FROM SALES OF OUR PRODUCTS BY
THIRD PARTIES OVER WHOM WE HAVE LIMITED INFLUENCE, AND WE MAY NOT BE ABLE TO
GENERATE SUFFICIENT SALES REVENUES TO SUSTAIN OUR GROWTH AND STRATEGY PLANS.
We expect that most of our near term revenues will come from sales of our
new diabetes product line acquired from Sterling Medivations, which has not
been launched yet and some of which is still in development, and from
continuing sales of our BiliChek product line. In addition, 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 with respect to products being
jointly developed, may not be able to sell sufficient volumes of our products
to generate profits for us. In addition, our profit margins on some of our
products are not likely to increase over time because they are subject to
predetermined royalty rates and manufacturing profit rates. The majority of our
revenues and profits are expected to be derived from sales of the Simple Choice
line of products, followed by royalties and manufacturing profits that we will
receive from Abbott and Respironics resulting from sales of the products we are
developing with each of these companies.
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 OR APPLY TECHNOLOGY IN MORE
INNOVATIVE WAYS 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.
Our products are based on new methods of glucose monitoring, diabetes
detection, infant jaundice and cervical cancer detection and new methods of
insulin delivery. 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 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, insulin delivery, 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 diabetes detection product on a
limited scale. We plan to have our initial product offerings in the insulin
delivery area manufactured by a third party. We may decide to manufacture these
products ourselves in the future or may decide to manufacture products that are
currently under development in this market segment. We have the right to
manufacture certain glucose monitoring products under our agreement with Abbott,
and if we and Roche determine to seek approval for and market a diabetes
detection product, we will undertake to manufacture these products 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, 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. In addition, we will be
responsible for marketing our Simple Choice product line. We have relatively
limited
experience in marketing or selling medical device products and only have a 13
person marketing and sales staff. In order to successfully continue to market
and sell our products, we must either develop a marketing and sales force or
expand our arrangements with third parties to market and sell our products. 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, any revenues we would receive 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 for any revenues to be received from our glucose
monitoring product. 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
specified products or will fund a substantial portion of the relevant
expenditures for the relevant product. 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 the relevant product. We may not be able to meet
these milestones, or our collaborative partners may not continue to fund our
expenditures.
We bear responsibility for all aspects of our Simple Choice product
line, which is not being developed with a collaborative partner. 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 2002, but may not
be sufficient to fund our operations to the point of commercial introduction of
our glucose monitoring products, our cervical cancer detection product or our
full line of diabetes products. Any required additional funding may not be
available on terms attractive to us, or at all. To the extent we cannot obtain
additional funding, our ability to continue to develop and introduce products to
market will be limited. 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.
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 27% of our outstanding common stock as
of December 31, 2001. 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.
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 manufacturing
operations expired in December 2001 and is now a month-to-month lease, 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 examined the scope of joint technology under the agreement
and held that the two patent applications at issue 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/NIMCO filed a new Demand for Arbitration of
certain disputes arising under the licensing agreement with SpectRx. Altea/NIMCO
sought a decision requiring SpectRx to jointly assign certain patents and patent
applications to Altea, holding SpectRx liable for alleged misconduct by a
subcontractor, declaring that SpectRx was required to engage in joint
development with Altea, and declaring that SpectRx had not achieved
commercialization under the licensing agreement. Near the end of 2001, the
parties resolved the dispute by agreeing to amend the licensing agreement and
dismiss the arbitration. The amended licensing agreement released and discharged
each of the parties from any and all claims of any nature arising before
December 30, 2001 of which the parties had knowledge as of December 30, 2001.
Although ownership rights in and to a limited number of patents and patent
applications remained in dispute following the execution of the amended
licensing agreement, the parties subsequently resolved all such disputes
informally.
On August 16, 2000, SpectRx filed a complaint for Declaratory Judgment
against Ampersand Medical Corp. ("Ampersand") 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
announced that they had agreed to a settlement on February 1, 2002 releasing
the parties from all claims.
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, 2002 was 126.
The high and low last sales prices for the calendar years 2000 and 2001
as reported by the Nasdaq National Market are as follows:
2000 2001
--------------------- -----------------------
HIGH LOW HIGH LOW
------ ------- ------ -------
First Quarter $18.00 $11.875 $10,250 $6.000
Second Quarter $14.50 $ 9.000 $ 9.210 $5.045
Third Quarter $10.25 $ 7.625 $ 8.700 $5.100
Fourth Quarter $10.25 $ 7.315 $ 8.100 $5.650
We have not paid any dividends since our inception and do not intend to
pay any dividends in the foreseeable future.
In June 2001, we announced that we had completed two private
placements. On June 4, 2001, we entered into an agreement with affiliates of
SAFECO Corporation, which invested about $9.5 million in SpectRx common stock
before transaction expenses. On June 13, 2001, we entered into an agreement with
affiliates of Special Situations Fund, which invested about $2.5 million in
SpectRx common stock before transaction expenses. The financings consisted, in
total, of sales of about 1.9 million shares of common stock and warrants to
purchase 379,127 shares of common stock. Under the terms of the agreements, each
share of common stock was sold at a price of $6.319 per share. The first
transaction, funded on June 4, 2001, involved the private placement of 1.5
million shares of common stock. The second transaction, funded on June 13, 2001,
involved the private placement of 395,633 shares of common stock. The
combination of these two transactions resulted in gross proceeds to SpectRx of
about $12 million before transaction expenses. The 1,895,633 shares issued in
these transactions constituted 22.2% of our common stock outstanding prior to
the first private placement transaction. In addition, the purchasers of common
stock also received warrants to purchase an aggregate of 379,127 shares of
common stock for $9.8874 per share. These warrants expire on the fifth
anniversary of their issuance date. The warrants are valued at $1.7 million and
are included in additional paid-in capital in our balance sheet. These
securities were issued in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act of 1933. On August 30, 2001, our common
stockholders, excluding the purchasing affiliates of SAFECO and Special
Situations Fund, approved these transactions.
On October 3, 2001, Abbott invested an additional $1 million in SpectRx
common stock, acquiring 126,199 shares at $7.92 per share. The purchase was
associated with a milestone payment under a program to commercialize our
continuous glucose monitoring technology for people with diabetes. These
securities were issued in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act of 1933.
On September 19, 2001, we announced that our board of directors had
approved a stock repurchase program for up to $1 million of our common stock.
For the year ended December 31, 2001, we had purchased 6,700 shares of common
stock at an average price of $5.66 per share.
On December 31, 2001, we acquired Sterling Medivations, which survived
the merger as our wholly-owned subsidiary. The merger was effected pursuant to
an Agreement and Plan of Merger, dated December 31, 2001. In connection with
this transaction, we issued an initial 620,249 shares of our common stock, which
was determined based upon an agreed upon price of $7.29 per share for purposes
of the merger, to former holders of Sterling Medivations' capital stock. In
addition, we reserved 22,625 shares of our common stock for future issuance to
holders of options to acquire shares of Sterling Medivations common stock, which
were converted into options to acquire shares of SpectRx common stock in the
transaction. Following the consummation of the merger, the shares we issued and
reserved were adjusted based upon certain adjustments to the financial
statements of Sterling Medivations, as contemplated by the terms of the
Agreement and Plan of Merger. As a result, we currently estimate that the number
of shares issued to former holders of Sterling Medivations' capital stock will
be reduced to 610,338 shares, and the number of shares reserved for future
issuance to holders of options to acquire shares of Sterling Medivations common
stock, which were converted into options to acquire shares of SpectRx common
stock, will be reduced to 22,024 shares. Each of these share numbers remain
subject to further adjustment pursuant to the Agreement and Plan of Merger for a
period expected not to exceed six months from December 31, 2001. Up to an
additional 1,234,567 shares of common stock could be issued to former
stockholders and reserved for option holders of Sterling Medivations, if the
product line of Sterling Medivations meets specified financial goals. These
securities were issued in reliance on the exemption from registration provided
by Rule 506 of Regulation D under the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
SPECTRX
(IN THOUSANDS EXCEPT FOR PER SHARE FIGURES)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2001 2000 1999 1998 1997
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
REVENUES $ 2,458 $ 4,968 $ 3,337 $ 1,406 $ 901
COST AND EXPENSES:
COST OF PRODUCT SALES 2,064 1,732 1,708 1,626 0
RESEARCH & DEVELOPMENT 3,842 5,804 5,170 4,234 3,714
MARKETING 846 957 900 1,058 835
GENERAL & ADMINISTRATIVE 2,941 3,177 2,222 1,908 2,272
------- ------- ------- ------- -------
LOSS FROM OPERATIONS (7,235) (6,702) (6,663) (7,420) (5,920)
NET INTEREST AND OTHER
INCOME (EXPENSE) 269 355 125 783 194
------- ------- ------- ------- -------
NET LOSS $(6,966) $(6,347) $(6,538) $(6,637) $(5,726)
PREFERRED STOCK DIVIDENDS (315) (315) (14) 0 0
------- ------- ------- ------- -------
LOSS AVAILABLE TO COMMON
SHARE STOCKHOLDERS $(7,281) $(6,662) $(6,552) $(6,637) $(5,726)
======= ======= ======= ======= =======
NET LOSS PER SHARE
BASIC $ (.75) $ (.79) $ (.82) $ (.84) $ (1.26)
DILUTED (.75) $ (.79) $ (.82) $ (.84) $ (1.26)
SHARES USED TO COMPUTE
NET LOSS PER SHARE
BASIC 9,646 8,429 8,033 7,926 4,528
DILUTED 9,646 8,429 8,033 7,926 4,528
CONSOLIDATED BALANCE SHEET DATA
TOTAL ASSETS 18,325 7,148 7,693 7,654 14,999
TOTAL LONG TERM
OBLIGATIONS, INCLUDING
CONVERTIBLE, REDEEMABLE
PREFERRED STOCK 5,250 5,960 5,645 0 752
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 feasible, 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 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 many of our products.
The following discussion should be read in conjunction with our financial
statements and related notes 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 some 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, 2001, as a result of subsequent financings, our interest in
FluorRx was 43%. In December 2001, we acquired 100% of the common stock of
Sterling Medivations, Inc., a company formed for the purpose of developing and
marketing insulin delivery products.
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, 2001, we have an
accumulated deficit of about $39.3 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 at
least 2002 as we continue to expend substantial resources to introduce our
Simple Choice product line, complete development of our products, obtain
regulatory clearances or approvals, build our marketing, sales, manufacturing
and finance organizations and conduct further research and development.
We expect that most of our near term revenues will come from our sales
of our new diabetes product line acquired from Sterling Medivations. In
addition, we expect to receive revenues that will be derived from royalties and
manufacturing profits that we will receive from Abbott and Respironics resulting
from 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 revenues or 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.
CRITICAL ACCOUNTING POLICIES
The material accounting policies that we believe are the most critical
to an investor's understanding of our financial results and condition are
discussed below. Because we are still early in our enterprise development, the
number of these policies requiring explanation are limited. As we begin to
generate increased revenue from different sources, we expect that the number of
applicable policies and complexity of the judgments required will increase.
Currently our policies that could require critical management judgment
are in the areas of revenue recognition, allowance for doubtful accounts,
accruals of product warranties and inventory valuation.
- Revenue Recognition: We recognize revenue from sales of
products or services upon shipment of products or services. We
also recognize milestone revenue from our collaborative
partners when a milestone has been accomplished or when we and
our partner agree that a milestone is earned, which may
require management's judgement in the case of a disagreement
between us and a collaborative partner.
- Allowance for Doubtful Accounts: We estimate losses from the
inability of our customers or subsidiaries to make required
payments, and periodically review the payment history of each
of our customers or subsidiaries, as well as their financial
condition, and revise our reserves as a result.
- Accruals of Product Warranties: We recognize a cost for
warranty work on each of our products at the time of sale and
match actual warranty work against that accrual, as the work
is performed. We periodically review the level of warranty
accrual and the actual warranty work incurred and adjust these
as needed.
- Inventory Valuation: Inventories are valued at the lower of
cost or market value and have been reduced by an allowance for
excess and obsolete inventories.
RESULTS OF OPERATIONS
Comparison of 2001 and 2000
General. Loss available to common stockholders increased to about $7.3
million, or ($0.75) per share in 2001 from about $6.7 million, or ($0.79) per
share in 2000. The increased loss was due primarily to a $2.6 million decrease
in milestone payments received from collaborative partners in 2001 as compared
to milestone payments received in 2000. This was offset by an increase in
expense reimbursements from our collaborative partners in 2001 as compared to
reimbursements in 2000 of about $2.0 million. We expect net losses to continue.
If we are unable to attain specific milestones under collaborative agreements,
our collaborative partners may not make milestone payments under, or may
terminate altogether, the agreements. If this were to happen, future net losses
would increase as a result of spending increases necessary to complete research,
development and clinical trials of our products, begin sales and marketing
efforts and establish manufacturing capabilities, with respect to the products
covered by the collaborative agreements. This would delay some of our product
development activities. In addition, we expect net losses to continue as we
begin sales and marketing efforts and establish marketing capabilities for our
Simple Choice product line.
Revenue and Cost of Product Sales. Total revenues decreased to about
$2.5 million in 2001 from about $5.0 million in 2000. The decrease was solely
due to a decrease in milestone payments, other than equity purchases, received
from collaborative partners, which decreased to $100,000 in 2001 from about $2.7
million in 2000. Product sales increased approximately 6% to $2.4 million in
2001 from about $2.2 million in 2000. Revenues related to the BiliChek product
line increased approximately 14%
for the year. Cost of product sales did not exceed product revenue for the
first time in 2000, and again in 2001, but at a relatively low margin as we are
in the early stages of product introduction. Cost of product sales increased to
about $2.1 million in 2001 from about $1.7 million in 2000. Cost of product
sales was reduced by about $332,000 in 2000 due to an agreement with a
collaborative partner to reimburse us for excess capacity. Also in 2001, we took
a one time write off of obsolete tooling of about $150,000.
Research and Development Expenses. Research and development expenses
decreased to about $3.8 million in 2001 from about $5.8 million in 2000
primarily due to an increase of about $2.0 million in expense reimbursements
from our collaborative partners, particularly reimbursements from Abbott
relating to our continuous glucose monitoring product. We expect research and
development expenses to increase in the future as we develop products associated
with our current products and the Simple Choice insulin delivery products
acquired with Sterling Medivations.
Sales and Marketing. Sales and marketing expenses decreased to about
$846,000 in 2001 from about $957,000 in 2000. The decrease in expense was due to
a decrease in travel and related expenses incurred in 2000 relating to
establishing distribution outlets for our BiliChek product line and a reduction
of costs associated with marketing materials for those distribution channels. We
expect sales and marketing expenses to increase in the future as we prepare to
market and sell our Simple Choice product line acquired from Sterling
Medivations.
General and Administrative Expense. General and administrative expense
decreased from about $2.9 million for 2001 from about $3.2 million in 2000. The
decrease resulted from more favorable rates on insurance of approximately
$50,000, a reduction of allowances on uncollectables due to a much higher
percentage of collections on receivables than originally anticipated, and a
reduction of legal expenses associated with litigation during 2001 as compared
to 2000.
Net Interest Income and Other Expense. Net interest income and other
expense decreased to about $269,000 in 2001 from about $355,000 in 2000.
Although we did maintain higher cash balances in 2001 as compared to 2000, the
decrease is directly attributed to the reduction in interest rates experienced
during 2001.
Comparison of 2000 and 1999
General. Loss available to common stockholders increased to about $6.7
million, or ($.79) per share, in 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 general and administrative expenses.
Revenues and Cost of Product Sales. Revenues increased to about $5.0
million in 2000 from about $3.3 million in 1999. The increase was both in
revenue from product sales and milestones from collaborative 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
in 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 in 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 in 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 about $1.0 million.
Sales and marketing expenses. Sales and marketing expenses increased to
about $957,000 in 2000 from about $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.
General and administrative expenses. General and administrative
expenses increased to about $3.2 million in 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.
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.
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,
2001, we received about $48.6 million in net proceeds from sales of our debt and
equity securities. At December 31, 2001, we had cash of about $9.5 million and
working capital of about $9.3 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.
In January 2000, we received an additional $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.
In June 2001, we received $12 million from our sales of an aggregate of
about 1.9 million shares of common stock and warrants to purchase about 380,000
shares of common stock to affiliates of SAFECO Corporation and Special
Situations Fund in private placement transactions.
In October 2001, we received $1 million from our sales of about 126,000
shares of common stock to Abbott in connection with a milestone under a program
to commercialize our continuous glucose monitoring technology for people with
diabetes. We also received funds in 2001 from grants related to our development
programs. In September 2001, we received a grant of $338,000 from the Centers
for Disease Control for our continuous glucose monitoring product, and in July
2001, we received a $130,000 grant from the National Cancer Institute for our
cervical cancer product.
Our major cash flows in 2001 consisted of cash out-flow of $6.4
million from operations, offset by the cash in-flow of $12.1 million of private
placement financing net of transaction costs.
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 will
need additional funds as compared to prior years to implement the introduction
of the Simple Choice product line. We believe that our existing capital
resources will be sufficient to satisfy our funding requirements through 2002.
However, these resources may not be sufficient to fund our operations to the
point of commercial introduction of our glucose monitoring product our
cervical cancer product or our full line of diabetes products.
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 or our inability to obtain
financing from other sources would have a material adverse effect on our
business, financial condition and results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
The FASB issued SFAS No. 141, "Accounting for Business Combinations,"
on June 30, 2001. It requires it at all business combinations initiated after
June 30, 2001 be accounted for using the purchase method of accounting.
The FASB issued SFAS No. 142, "Accounting for Goodwill and Other
Intangible Assets," on June 30, 2001. It requires that goodwill and certain
intangible assets will no longer be subject to amortization, but instead will
be subject to a periodic impairment assessment by applying a fair-value based
test. The Company's required adoption date is January 1, 2002. Adoption of SFAS
No. 142 will not have a material impact on the Company's results of operations
or financial position as substantially all of the Company's intangible assets
continue to be subject to amortization.
Additionally, in June 2001, the FASB issued SFAS No. 143, "Asset
Retirement Obligations," which establishes new accounting and reporting
standards for legal obligations associated with retiring assets. The fair value
of a liability for an asset retirement obligation must be recorded in the period
in which it is incurred, with the cost capitalized as part of the related
long-lived assets and depreciated over the asset's useful life. Changes in the
liability resulting from the passage of time will be recognized as operating
expenses. SFAS No. 143 must be adopted by 2003 and is not expected to have a
material impact on the Company's results of operations or financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long Lived Assets," which supercedes both Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets for Long-Lived
Assets to be Disposed Of," and the accounting and reporting provisions for the
disposal of a segment of a business contained in APB Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 144 establishes a single accounting model for long-lived
assets to be disposed of by sale and broadens the presentation of discontinued
operations. The provisions of SFAS No. 144 are effective beginning in 2002 and
are not expected to have a material impact on the Company's results of
operations or financial position.
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
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SpectRx, Inc.:
We have audited the accompanying consolidated balance sheets of SPECTRX, INC. (a
Delaware corporation) and subsidiary as of December 31, 2000 and 2001 and the
related statements of operations, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2001. 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. and subsidiary as
of December 31, 2000 and 2001 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Atlanta, Georgia
February 14, 2002
SPECTRX, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 2001
(IN THOUSANDS)
2000 2001
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,609 $ 9,458
Accounts receivable, net of allowance for doubtful
accounts of $138 and $76 in 2000 and 2001,
respectively 1,259 1,229
Inventories 481 437
Other current assets 377 408
-------- --------
Total current assets 5,726 11,532
-------- --------
NONCURRENT ASSETS:
Property and equipment, net 894 513
Intangibles 0 5,723
Due from related parties 528 557
-------- --------
Total noncurrent assets 1,422 6,793
-------- --------
$ 7,148 $ 18,325
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,020 $ 1,018
Accrued liabilities 1,262 1,194
-------- --------
Total current liabilities 2,282 2,212
-------- --------
DEFERRED TAX LIABILITY 0 1,591
-------- --------
COLLABORATIVE PARTNER ADVANCE 381 381
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
REDEEMABLE CONVERTIBLE PREFERRED STOCK 5,579 4,769
-------- --------
STOCKHOLDERS' (DEFICIT) EQUITY:
Preferred stock, $.001 par value; 5,000 shares
authorized, 100 shares issued and outstanding as
preferred stock in 2001, and 525 and 425 shares
issued and outstanding as redeemable convertible
preferred stock in 2000 and 2001, respectively 0 1,125
Common stock, $.001 par value; 50,000 shares
authorized, 8,508 and 11,187 shares issued and
outstanding in 2000 and 2001, respectively 9 11
Additional paid-in capital 30,927 47,604
Treasury stock, at cost 0 (38)
Deferred compensation 0 (19)
Notes receivable from officers (31) (31)
Accumulated deficit (31,999) (39,280)
-------- --------
Total stockholders' (deficit) equity (1,094) 9,372
-------- --------
$ 7,148 $ 18,325
======== ========
The accompanying notes are an integral part of these
consolidated balance sheets.
SPECTRX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001
(IN THOUSANDS EXCEPT PER SHARE DATA)
1999 2000 2001
--------- --------- ---------
REVENUES:
Product sales $ 1,440 $ 2,219 $ 2,358
Collaborative agreements 1,897 2,749 100
--------- --------- ---------
Total revenue 3,337 4,968 2,458
--------- --------- ---------
COSTS AND EXPENSES:
Cost of product sales 1,708 1,732 2,064
Research and development 5,170 5,804 3,842
Sales and marketing 900 957 846
General and administrative 2,222 3,177 2,941
--------- --------- ---------
10,000 11,670 9,693
--------- --------- ---------
Operating loss (6,663) (6,702) (7,235)
INTEREST INCOME (EXPENSE), NET 133 334 254
OTHER INCOME (EXPENSE), NET (8) 21 15
--------- --------- ---------
NET LOSS (6,538) (6,347) (6,966)
PREFERRED STOCK DIVIDENDS (14) (315) (315)
--------- --------- ---------
LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (6,552) $ (6,662) $ (7,281)
========= ========= =========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.82) $ (0.79) $ (0.75)
========= ========= =========
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 8,033 8,429 9,646
========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
SPECTRX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001
(IN THOUSANDS)
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE STOCKHOLDERS'
PREFERRED -------------- PAID-IN TREASURY DEFERRED FROM ACCUMULATED (DEFICIT)
STOCK SHARES AMOUNT CAPITAL STOCK COMPENSATION OFFICERS DEFICIT EQUITY
--------- ------ ------ ---------- -------- ------------ ---------- ----------- -------------
BALANCE, DECEMBER 31, 1998 $ 0 8,014 $ 8 $25,761 $ 0 $(134) $(31) $(18,785) $ 6,819
Exercise of stock options 0 31 0 84 0 0 0 0 84
Employee stock purchase plan 0 11 0 43 0 0 0 0 43
Amortization of deferred
compensation 0 0 0 0 0 76 0 0 76
Dividend on preferred stock 0 0 0 0 0 0 0 (14) (14)
Net loss 0 0 0 0 0 0 0 (6,538) (6,538)
------ ------ --- ------- ---- ----- ---- -------- -------
BALANCE, DECEMBER 31, 1999 0 8,056 8 25,888 0 (58) (31) (25,337) 470
Issuance of common stock 0 406 1 4,863 0 0 0 0 4,864
Exercise of stock options 0 37 0 107 0 0 0 0 107
Employee stock purchase plan 0 9 0 69 0 0 0 0 69
Amortization of deferred
compensation 0 0 0 0 0 58 0 0 58
Dividend on preferred stock 0 0 0 0 0 0 0 (315) (315)
Net loss 0 0 0 0 0 0 0 (6,347) (6,347)
------ ------ --- ------- ---- ----- ---- -------- -------
BALANCE, DECEMBER 31, 2000 0 8,508 9 30,927 0 0 (31) (31,999) (1,094)
Issuance of common stock 0 2,668 2 16,598 0 0 0 0 16,600
Conversion to preferred stock 1,125 0 0 0 0 0 0 0 1,125
Exercise of stock options 0 6 0 8 0 0 0 0 8
Employee stock purchase plan 0 12 0 71 0 0 0 0 71
Treasury stock purchase 0 (7) 0 0 (38) 0 0 0 (38)
Issuance of stock options 0 0 0 0 0 (19) 0 0 (19)
Dividend on preferred stock 0 0 0 0 0 0 0 (315) (315)
Net loss 0 0 0 0 0 0 0 (6,966) (6,966)
------ ------ --- ------- ---- ----- ---- -------- -------
BALANCE, DECEMBER 31, 2001 $1,125 11,187 $11 $47,604 $(38) $ (19) $(31) $(39,280) $ 9,372
------ ------ --- ------- ---- ----- ---- -------- -------
The accompanying notes are an integral part of these consolidated statements.
SPECTRX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001
(IN THOUSANDS)
1999 2000 2001
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,538) $ (6,347) $ (6,966)
Adjustments to reconcile net loss to net cash used in operating activities
excluding the effects of acquisition:
Depreciation and amortization 374 400 360
Retirement of property and equipment 38 0 116
Amortization of deferred compensation 76 58 0
Changes in operating assets and liabilities:
Accounts receivable (269) (307) 30
Inventories (137) 60 44
Other current assets (85) (173) (11)
Accounts payable 234 350 (85)
Accrued liabilities 509 414 121
--------- --------- ---------
Total adjustments 740 802 575
--------- --------- ---------
Net cash used in operating activities (5,798) (5,545) (6,391)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (251) (440) (90)
Acquisition of Sterling Medivations, net of cash and cash equivalents 0 0 198
--------- --------- ---------
Net cash provided by investing activities (251) (440) 108
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net of issuance costs 127 4,980 12,199
Treasury stock purchase 0 0 (38)
Issuance of redeemable convertible preferred stock 2,750 2,500 0
Due from related parties (28) (29) (29)
Advance from a collaborative partner 381 0 0
--------- --------- ---------
Net cash provided by financing activities 3,230 7,451 12,132
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,819) 1,466 5,849
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,962 2,143 3,609
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,143 $ 3,609 $ 9,458
========= ========= =========
CASH PAID FOR:
Interest $ 2 $ 3 $ 2
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Payment of dividends in the form of preferred stock and redeemable
convertible preferred stock $ 14 $ 315 $ 315
========= ========= =========
Common stock issued for royalty payments $ 0 $ 60 $ 189
========= ========= =========
Common stock issued in acquisition of Sterling Medivations $ 0 $ 0 $ 4,229
========= ========= =========
Stock options issued in acquisition of Sterling Medivations $ 0 $ 0 $ 62
========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
SPECTRX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 2001
1. ORGANIZATION AND BACKGROUND
SpectRx, Inc. and subsidiary (the "Company" or "SpectRx"), each a
Delaware corporation, is a medical technology company developing and
providing products for the diabetes and noninvasive diagnostic markets.
The Company uses its technologies to provide minimally-invasive blood
sampling procedures, insulin delivery products and cancer detection
products. The Company's goal is to introduce products that reduce or
eliminate pain, are convenient to use, and provide rapid results at
the point of care, thereby improving patient well-being and reducing
health care costs. The Company's products are based upon a variety of
proprietary technologies. The Company's infant jaundice product and
products in development for glucose monitoring, diabetes screening and
cancer detection are based upon its proprietary biophotonic
technologies. The technologies employed in its insulin delivery
products, including those under development, are designed to deliver
insulin to people who have diabetes more comfortably and effectively.
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. On December 31, 2001, the
Company acquired all of the outstanding common stock of Sterling
Medivations, Inc. ("Sterling") a developer of innovative insulin
delivery products for people with diabetes. The Company intends to
develop and market its insulin products without a collaborative
partner.
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, 2001, it
has an accumulated deficit of about $39.3 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 not 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 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 at least 2002 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.
A significant portion of the Company's revenues and profits are
expected to be derived from royalties and manufacturing profits that it
will receive from Abbott and Respironics resulting from sales of the
products for which it has collaborative arrangements with each of these
companies and from the insulin delivery products
developed by its subsidiary, Sterling. The royalties and manufacturing
profits that the Company expects to receive from each of its
collaborative partners and from Sterling depend on sales of these
products. The Company markets the majority of its infant jaundice
product directly to distributors. The Company intends to market its
insulin delivery products directly to distributors and other customers.
The Company and its collaborative partners may not be able to sell
sufficient volumes of its products to generate substantial royalties,
distribution profits, and manufacturing profits for the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
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.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of SpectRx and its subsidiary, Sterling Medivations. All significant
intercompany transactions have been eliminated.
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,
2000 and 2001 (in thousands):
2000 2001
----- -----
Raw materials $ 380 $ 298
Work in process 11 38
Finished goods 90 101
----- -----
$ 481 $ 437
===== =====
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, 2000 and 2001 (in thousands):
2000 2001
------- -------
Equipment $ 2,016 $ 1,953
Furniture and fixtures 388 394
------- -------
2,404 2,347
Less accumulated depreciation 1,510 1,834
------- -------
Property and equipment, net $ 894 $ 513
======= =======
INTANGIBLES
Intangible assets include the excess of the purchase price of the
acquisition over the fair value of net tangible assets acquired as well
as various other acquired intangibles. Intangible assets are amortized
over the following estimated useful lives:
YEARS
--------------
Goodwill Not applicable
Patents 13 years
Noncompete and employment agreements 18 months
Goodwill is not subject to amortization but will be subject to a
periodic impairment assessment by applying a fair-value based test.
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 and intangibles 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 $608,000,
$550,000, and $445,000 in 1999, 2000, and 2001.
ACCRUED LIABILITIES
Accrued liabilities are summarized as follows at December 31, 2000 and
2001 (in thousands):
2000 2001
------- -------
Accrued compensation $ 622 $ 483
Accrued royalties 224 360
Other accrued expenses 416 351
------- -------
Accrued liabilities $ 1,262 $ 1,194
======= =======
REVENUE RECOGNITION
In accordance with Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," the Company records revenue from
product sales at the time the product is shipped or title passes
pursuant to the terms of the agreement with the customer, the amount
due from the customer is fixed or determinable, and collectibility of
the related receivable is reasonably assured. Revenue is recognized
only when we have no significant future performance obligation.
Revenue from collaborative agreements is recorded when milestones have
been met. Periodic license fee payments under collaborative agreements
related to future performance are deferred and recognized as income
when earned.
In July and September 2000, the Emerging Issues Task Force ("EITF")
reached a consensus on Issue 00-10, "Accounting for Shipping and
Handling Fees and Costs." EITF Issue 00-10 requires that all amounts
billed to a customer in a sale transaction for shipping an handling be
classified as sales and recommends that shipping and handling expenses
be classified as cost of sales. The Company implemented EITF Issue
00-10 during 2001. The adoption of EITF Issue 00-10 did not have a
material impact on the Company's results of operations or financial
position.
RESEARCH AND DEVELOPMENT
Research and development expenses consist of non-reimbursed
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
"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, accounts receivable, 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, 2000 and 2001.
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.
DERIVATIVE INVESTMENTS AND HEDGING ACTIVITIES
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 was January 1, 2001. Upon adoption of
the three statements, there was no material impact to its results of
operations or financial position as the Company has no material
derivative instruments.
NEW ACCOUNTING PRONOUNCEMENTS
The FASB issued SFAS No. 141, "Accounting for Business Combinations,"
on June 30, 2001. It requires that all business combinations initiated
after June 30, 2001 be accounted for using the purchase method of
accounting.
The FASB issued SFAS No. 142, "Accounting for Goodwill and Other
Intangible Assets," on June 30, 2001. It requires that goodwill and
certain intangible assets will no longer be subject to amortization,
but instead will be subject to a periodic impairment assessment by
applying a fair-value based test. The Company's required adoption date
is January 1, 2002. Adoption of SFAS No. 142 will not have a material
impact on the Company's results of operations or financial position as
substantially all of the Company's intangible assets continue to be
subject to amortization.
Additionally, in June 2001, the FASB issued SFAS No. 143, "Asset
Retirement Obligations," which establishes new accounting and reporting
standards for legal obligations associated with retiring assets. The
fair value of a liability for an asset retirement obligation must be
recorded in the period in which it is incurred, with the cost
capitalized as part of the related long-lived assets and depreciated
over the asset's useful life. Changes in the liability resulting from
the passage of time will be recognized as operating expenses. SFAS No.
143 must be adopted by 2003 and is not expected to have a material
impact on the Company's results of operations or financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long Lived Assets," which supercedes both
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
for Long-Lived Assets to be Disposed Of," and the accounting and
reporting provisions for the disposal of a segment of a business
contained in APB Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions." SFAS No. 144 establishes a single accounting model
for long-lived assets to be disposed of by sale and broadens the
presentation of discontinued operations. The provisions of SFAS No. 144
are effective beginning in 2002 and are not expected to have a material
impact on the Company's results of operations or financial position.
RECLASSIFICATION
Certain amounts in the December 31, 1999 and 2000 financial statements
have been reclassified to conform to the current year presentation.
3. ACQUISITION
On December 31, 2001, the Company purchased the outstanding shares of
Sterling Medivations. Sterling is a developer of innovative insulin
delivery products for people with diabetes. The acquisition of Sterling
expands the Company's diabetes business by adding a portfolio of
FDA-cleared insulin delivery products, including consumables for the
rapidly growing insulin pump market. As a result of the merger, the
Company issued 548,056 shares of Company common stock in exchange for
all of the outstanding Sterling common stock and preferred stock and
reserved 22,024 shares for issuance upon exercise of stock options
assumed in the merger with an estimated fair market value of $61,895
plus 62,282 shares related to cash balances following the merger,
Sterling stockholders and option holders will be entitled to up to an
aggregate of 1,234,567 additional shares of Company common stock in the
future if the Sterling product line achieves specified financial goals.
In connection with the acquisition of Sterling, the Company entered
into employment agreements with four employees for terms expiring June
2003. The excess of the cost over the estimated fair value of net
tangible assets acquired amounts to approximately $4.1 million and has
been included in intangibles in the accompanying consolidated balance
sheets. The $4.1 million purchase price excess has been allocated
between patents and noncompete agreements. In addition, goodwill and a
related deferred tax liability of approximately $1.6 million have been
recorded to reflect taxable temporary differences existing at December
31, 2001. The acquisition has been accounted for as a purchase in
accordance with SFAS No. 141, "Accounting for Business Combinations."
The Company's preliminary estimate of the purchase price allocation
arising from the acquisition is as follows (in thousands):
Purchase price $ 4,291
Less:
Net tangible assets acquired (525)
Patents (4,100)
Noncompete and employment agreements (32)
Deferred compensation (19)
Plus:
Deferred tax liability 1,591
Transaction costs of acquisition 385
--------
Goodwill $ 1,591
========
The following unaudited pro forma information has been prepared
assuming that the acquisition occurred at the beginning of the year of
acquisition (2001) and the year immediately preceding (2000). The
unaudited pro forma information is presented for informational purposes
only and may not be indicative of the actual results of operations
which would have occurred had the acquisition been consummated at the
beginning of the respective periods, nor is the information necessarily
indicative of the results of operation which may occur in the future
operations of the combined entities (in thousands, except loss per
share data).
2000 2001
-------- --------
Pro forma revenues $ 4,968 $ 2,458
Pro forma net loss available to common stockholders (7,283) (8,424)
Pro forma net loss per share (basic and diluted) $ (0.81) $ (0.82)
4. 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. The
Company has also suspended recording gains and losses from its
investment in FluorRx. Suspended equity (losses) gains amounted to
$(342,000), $(367,000) and $94,000 for the years ended December 31,
1999, 2000 and 2001, respectively. At December 31, 2001, the cumulative
suspended equity loss amounted to $1,406,000.
In 1999, 2000, and 2001, the Company paid certain patent maintenance
and minimum royalty costs amounting to $80,000, $226,000, and $235,000,
respectively, related to technology owned by the Company and
sublicensed to FluorRx. These costs have been expensed as paid.
5. 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 gross 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, 2001, the Company issued 25,880
shares of common stock in satisfaction of minimum royalty payments
amounting to $189,000 related to the Company's exclusive rights to
certain licensed technology.
In June 2001, the Company completed two private placements. On June 4,
2001, the Company entered into an agreement with an investor, which
invested about $9.5 million in SpectRx common stock before transaction
expenses. On June 13, 2001, the Company entered into an agreement with
another investor, which invested about $2.5 million in SpectRx common
stock before transaction expenses. The financings consisted, in total,
of sales of approximately 1.9 million shares of common stock and
warrants to purchase 379,127 shares of common stock. Under the terms of
the agreements, each share of common stock was sold at a price of
$6.319 per share. The first transaction, funded on June 4, 2001,
involved the private placement of 1.5 million shares of common stock.
The second transaction, funded on June 13, 2001, involved the private
placement of 395,633 shares of common stock. The combination of these
two transactions resulted in net proceeds to SpectRx of approximately
$11.2 million after transaction expenses. In addition, the purchasers
of common stock also received warrants to purchase an aggregate of
379,127 shares of common stock for $9.8874 per share. These warrants
expire on the fifth anniversary of their issuance date. The warrants
are valued at approximately $1.7 million and are included in additional
paid-in capital in the accompanying consolidated balance sheets.
In October 2001, the Company issued 126,199 shares of common stock to
Abbott for gross proceeds of $1 million. The issuance of shares of
common stock was associated with a milestone under a program to
commercialize the Company's continuous glucose monitoring technology
for people with diabetes.
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, 2000, and 2001,
the Company paid dividends in the form of redeemable convertible
preferred stock of $14,000, $315,000, and $315,000, respectively.
The preferred shares, together with any accrued but unpaid dividends,
are convertible shares of common stock at a conversion rate equal to
the greater of $9.39 per share or the average of the closing sales
price for 30 trading days that begin on the 15th trading day prior to
the Company's receipt of a conversion notice sent by the holder of
such shares. Also, the shares of preferred stock automatically convert
into shares of common stock on December 31, 2004 at such conversion
rate. The shares of preferred stock are mandatorily redeemable, except
with respect to 100,000 shares, by the Company at $10 per share, plus
accrued but unpaid dividends, beginning on December 31, 2002, if the
Company receives a written notice from the holders of at least a
majority of the shares of preferred stock on or before the later of
September 30, 2002 or 60 days subsequent to the date that the Company
gives notice to the holders of preferred stock of its right to redeem
the shares (which notice may not be given prior to June 1, 2002). If
this written election to be mandatorily redeemed is made, one-half
less 100,000 shares of the shares of preferred stock are to be
mandatorily redeemed on December 31, 2002, and the remaining one-half
on or prior to January 31, 2004, if the Company achieves a revenue
goal of $20 million during the year 2003. If the Company does not
achieve this goal, then of such shares of preferred stock outstanding,
one-half must be redeemed prior to January 31, 2004, and the balance
by December 31, 2004. Additionally, the Company has the option to
redeem the shares of any holder at $10 per share, plus accrued and
unpaid dividends, after receiving a notice from such holder electing
to convert such holder's shares of preferred stock into common stock.
The preferred stock also has a liquidation of $10 per share, plus all
accrued but unpaid dividends.
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.
In September 2001, the Company entered into an agreement with Abbott
whereby Abbott waived its right to redeem 100,000 shares of its
Redeemable Convertible Preferred Stock plus the related accrued but
unpaid dividends.
TREASURY STOCK
In September 2001, the Company's board of directors approved a stock
repurchase program whereby the Company can purchase up to $1.0 million
of its common stock. As of December 31, 2001, the Company has purchased
6,700 shares of common stock at an average price of $5.66 per share.
STOCK OPTIONS
In May 1995, the Company adopted the 1995 Stock 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,
2001, options to purchase 285,063 shares of common stock were available
for future grant under the Plan.
Stock option activity for each of the three years ended December 31,
2001 is as follows:
WEIGHTED
AVERAGE
NUMBER OF PRICE PER
OPTIONS SHARE
--------- ---------
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
Granted 63,168 7.12
Exercised (5,361) 1.40
Canceled (97,500) 10.23
---------- -------
Outstanding, December 31, 2001 1,390,367 $ 6.25
========== =======
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, 2001:
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-$ 0.70 355,003 $ 0.55 4.19 years 355,003 $ 0.55
$ 2.45-$ 4.13 101,291 2.99 6.02 95,745 2.96
$ 5.13-$ 9.00 643,805 7.58 6.70 532,552 7.53
$ 10.25-$ 16.50 290,268 11.37 8.40 129,244 11.42
--------- ---------
Total 1,390,367 $ 6.25 6.37 1,112,544 $ 5.36
========= =========
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.
In December 2001, as a result of the acquisition of Sterling
Medivations, the Company granted options to purchase 22,024 shares of
common stock at an exercise price of $7.29 per share in exchange for
all the outstanding options, vested and unvested, of Sterling.
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, 2001 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 1999, 2000, and 2001:
1999 2000 2001
---------- ---------- ----------
Risk-free interest rate 5.09% 6.05% 4.60%
Expected dividend yield 0% 0% 0%
Expected lives 4 years 4 years 4 YEARS
Expected volatility 58% 65% 63%
The total values of the options granted during the years ended December
31, 1999, 2000, and 2001 were approximately $749,000, $1,041,000, and
$115,000, 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):
1999 2000 2001
-------- -------- --------
Loss available to common stockholders:
As reported $ (6,552) $ (6,662) $ (7,281)
SFAS No. 123 Pro forma (7,315) (7,704) (8,384)
Basic and diluted net loss per share:
As reported $ (0.82) $ (0.79) $ (0.76)
SFAS No. 123 Pro forma (0.91) $ (0.91) $ (0.87)
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, 2001, there were 164,781
shares available for future issuance under this plan.
6. INCOME TAXES
The Company has incurred net operating losses ("NOLs") since inception.
As of December 31, 2001, the Company had net operating loss
carryforwards of approximately $36,381,000 available to offset its
future income tax liability. The NOL carryforwards begin to expire in
2007. The Company has recorded a valuation shares, together with any
accrued but unpaid dividends, are for all NOL
carryforwards. Utilization of existing NOL carryforwards may be limited
in future years if significant ownership changes have occurred.
Components of deferred taxes are as follows at December 31, 2000 and
2001 (in thousands):
2000 2001
--------- ---------
Deferred tax assets:
Net operating loss carryforwards $ 11,444 $ 13,825
========= =========
Deferred tax liabilities:
Intangible assets $ 0 $ 1,591
--------- ---------
Total net deferred tax asset before valuation
allowance 11,444 12,234
Less valuation allowance (11,444) (13,825)
--------- ---------
Total net deferred taxes $ 0 $ (1,591)
========= =========
The following is a summary of the items which caused recorded income
taxes to differ from taxes computed using the statutory federal income
tax rate for the years ended December 31, 1999, 2000, and 2001:
1999 2000 2001
---- ---- ----
Statutory federal tax rate (34)% (34)% (34)%
State taxes, net of federal benefit (4) (4) (4)
Nondeductible expenses 2 2 2
Valuation allowance 36 36 36
--- --- ---
0 % 0 % 0 %
=== === ===
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Future minimum rental payments at December 31, 2001 under
non-cancellable operating leases for office space and equipment are as
follows (in thousands):
2002 $253
2003 158
2004 123
2005 24
Rental expense was $225,000, $360,000, and $333,000 in 1999, 2000, and
2001, respectively.
EMPLOYMENT AGREEMENTS
In connection with the acquisition of Sterling, the Company entered
into employment agreements with four employees for terms expiring June
2003. The agreements each provide for severance of not more than
$235,000 plus benefits for termination of employment for any reason
other than cause. In the event of termination without cause, the salary
and benefits are to be paid for a term not to exceed six months.
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. The panel 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 examined the scope of Joint
Technology under the Agreement and held that the two patent
applications at issue 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.
In December 2000, Altea/NIMCO filed a new Demand for Arbitration of
certain disputes arising under the licensing agreement with SpectRx.
Altea/NIMCO sought a decision requiring SpectRx to jointly assign
certain patents and patent applications to Altea, holding SpectRx
liable for alleged misconduct by a subcontractor, declaring that
SpectRx was required to engage in joint development with Altea, and
declaring that SpectRx had not achieved commercialization under the
licensing agreement. Near the end of 2001, the parties resolved the
dispute by agreeing to amend the licensing agreement and dismiss the
arbitration. The amended licensing agreement released and discharged
each of the parties from any and all claims of any nature arising
before December 30, 2001 of which the parties had knowledge as of
December 30, 2001. Although ownership rights in and to a limited number
of patents and patent applications remained in dispute following the
execution of the amended licensing agreement, the parties subsequently
resolved all such disputes informally.
In August 2000, SpectRx filed a complaint for Declaratory Judgment
against Ampersand Medical Corp. ("Ampersand") 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 announced that they
had agreed to a settlement on February 1, 2002, releasing the parties
from all claims.
GRANT
In October 2000 and September 2001, the Company received grants of
$307,000 and $338,000, respectively, from the Center's for Disease
Control and Prevention ("CDC") to adapt its 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 $938,000 in
funding to date from the CDC. The Company also received a grant from
the National Cancer Institute for $130,000 in July 2001 for the
Company's cervical cancer program.
8. 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, 2001. 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, 2002. 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 2002.
However, it is management's intention not to call the notes in 2002.
Outstanding balances are reflected as due from related parties in the
accompanying consolidated balance sheets.
9. LICENSE AND TECHNOLOGY AGREEMENTS
As part of the Company's efforts to conduct research and development
activities and to commercialize potential products, the Company, from
time to time, enters into agreements with certain organizations and
individuals that further those efforts but also obligate the Company to
make future minimum payments or to remit royalties ranging from 1% to
3% of revenue from the sale of commercial products developed from the
research.
The Company generally has the option not to make required minimum
royalty payments, in which case the Company loses the exclusive license
to develop applicable technology. Minimum required payments to maintain
exclusive rights to licensed technology are as follows at December 31,
2001 (in thousands):
2002 $3,310
2003 710
2004 310
2005 310
2006 510
During 1999, 2000, and 2001 the Company incurred royalty expenses of
$423,000, $813,000, and $1,184,000, respectively.
Additionally, the Company is obligated to obtain and maintain certain
patents, as defined by the agreements.
10. 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 $39,000, $827,000, and
$2,801,000 for the years ended December 31, 1999, 2000, and 2001,
respectively, have been netted with research and development expenses
in the accompanying statements of operations.
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 5). The Company recorded revenues of $0, $2.5
million, and $0 during 1999, 2000, and 2001, respectively, related to
the achievement of certain milestones.
At December 31, 2001, a receivable from Abbott represented 42% of
accounts receivable. The balance due was paid in January 2002.
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 $524,000, $987,000, and
$831,000 for the years ended December 31, 1999, 2000, and 2001,
respectively, have been netted with research and development expenses
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 $700,000, $0, and $0 during 1999, 2000, and 2001,
respectively, related to the achievement of certain milestones.
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 1999,
2000, and 2001, the Company recorded $987,000, $124,000, and $0,
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 $200,000, $125,000, and $100,000 in
1999, 2000, and 2001, respectively, related to the achievement of
certain milestones. Additionally, Respironics purchased products
amounting to $364,000, $479,000, and $726,000 during 1999, 2000, and
2001, respectively, from the Company.
11. BUSINESS SEGMENT INFORMATION
The Company operates in one business segment, the research and
development of medical products. The Company had no product sales prior
to fiscal year 1998. During fiscal years 1999, 2000, and 2001, total
product revenues of $1,440,000, $2,219,000, and $2,358,000,
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 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):
1999 2000 2001
------ ------ ------
United States and Canada $ 364 $ 837 $1,043
Europe 566 687 958
Latin America 209 191 112
Middle East 154 54 67
Asia 81 400 144
Other 66 50 34
------ ------ ------
Total $1,440 $2,219 $2,358
====== ====== ======
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 2002 Annual Meeting of Stockholders
to be held on May 22, 2002, 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, 2002:
NAME AGE POSITION
- ---- --- --------
Mark A. Samuels 43 Chairman, chief executive officer and
director
Keith D. Ignotz 54 President, chief operating officer and
director
Thomas H. Muller, Jr. 60 Executive vice president, chief
financial officer and secretary
Mark L. Faupel 46 Vice president, research & development
Richard L. Fowler 45 Vice president, technology assessment
Robert G. Rothfritz 52 Vice president, operations
Walter J. Pavlicek 55 Vice president, engineering
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 any of our
executive officers and directors.
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.
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.
Walter J. Pavlicek, Ph.D. has served as our vice president of
engineering since joining us in July 2000. From 1995 to 2000, Dr. Pavlicek was
director of new products for Bayer Diagnostics and from 1991 to 1995, he was an
executive, information management for Boehringer Mannheim (since acquired by
Roche). From 1980 to 1991, Dr. Pavlicek was member of technical staff-supervisor
at Bell Laboratories. Dr. Pavlicek earned a Ph.D. and M.S. from Saint Louis
University and a B.S. from the University of San Francisco. All his degrees are
in Mathematics.
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.
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. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2000
and 2001
Consolidated Statements of Operations for the Years
Ended December 31, 1999,2000 and 2001
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1999, 2000 and 2001
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 2000 and 2001
Notes to Consolidated 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, 2001.
(C) EXHIBITS
The exhibits listed on the accompanying Index to Exhibits are
filed as part hereof, or incorporated by reference into, this
Report. All documents referenced below were filed pursuant to
the Securities Exchange Act of 1934 by Spectrx, Inc., file
number 0-22179, unless otherwise indicated.
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.
4.2(8) Form of Common Stock Warrant.
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.
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.
10.17A(1) License and Joint Development Agreement, dated March 1, 1996, between NonInvasive-Monitoring
Company, Inc., Altea Technologies, Inc. and SpectRx.
10.17B(11)** Amended and Restated License and Joint Development Agreement, dated December 30, 2001, between Non-Invasive-
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.
10.21D(9)* Fourth 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, 3 and 4 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.
10.26(10) Agreement and Plan of Merger, dated December 31, 2001 by and between SpectRx, Inc., Sterling Medivations, Inc.
SM Merge Sub, Inc. and certain shareholders of Sterling Medivations Inc.
23.1(11) Consent of Arthur Andersen LLP.
24.1 Power of Attorney (included on signature page).
99.1(11) Quality Assurance Provided by Arthur Andersen LLP
- -----------------
* Confidential treatment granted for portions of these agreements.
** Confidential treatment requested for portions of this agreement.
(1) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form S-1 (No. 333-22429) filed February 27,
1997, and amended on April 24, 1997, June 11, 1997, and June 30, 1997,
which Registration Statement became effective June 30, 1997.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997,
filed August 12, 1997.
(3) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997, filed
March 27, 1998.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998, filed
March 30, 1999, 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) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2000, filed April 2,
2001.
(8) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, filed May
14, 2001.
(9) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, filed
November 14, 2001.
(10) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K, as amended, filed January 14, 2002.
(11) Filed herewith.
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, on the 28th day of
March 2002.
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 28, 2002 /s/ Mark A. Samuels Chairman, Chief Executive Officer and
------------------------------- Director (Principal Executive Officer)
Mark A. Samuels
March 28, 2002 /s/ Thomas H. Muller, Jr. Executive Vice President and Chief
------------------------------- Financial Officer (Principal Financial
Thomas H. Muller, Jr. and Accounting Officer)
March 28, 2002 /s/ Keith D. Ignotz President, Chief Operating Officer
------------------------------- and Director
Keith D. Ignotz
March 28, 2002 /s/ Charles G. Hadley Director
-------------------------------
Charles G. Hadley
/s/ Earl R. Lewis
March 28, 2002 ------------------------------- Director
Earl R. Lewis
March 28, 2002 /s/ William E. Zachary Director
-------------------------------
William E. Zachary
March 28, 2002 /s/ Chris Monahan Director
-------------------------------
Chris Monahan