FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-22501
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SPECTRUMEDIX CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 25-1686354
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2124 Old Gatesburg Road, State College, Pennsylvania 16803
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(Address of principle executive offices)
(814) 867-8600
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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
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State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 4,288,466 shares of common
stock, par value $.00115 per share, outstanding as of January 22, 2001.
SPECTRUMEDIX CORPORATION
QUARTERLY REPORT
QUARTER ENDED DECEMBER 31, 2000
CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Condensed Balance Sheets - December 31, 2000 and March 31, 2000........................................ 1
Condensed Statements of Operations - Nine and Three Months Ended December 31, 2000 and December 31,
1999.................................................................................................. 2
Condensed Statements of Cash Flows - Nine and Three Months Ended December 31, 2000 and December 31,
1999.................................................................................................. 3
Notes to Condensed Financial Statements................................................................. 4-7
Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition............ 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 12
Item 2. Changes in Securities and Use of Proceeds............................................... 12
Item 3. Defaults Upon Senior Securities......................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders..................................... 12
Item 5. Other Information....................................................................... 12
Item 6. Exhibits and Reports on Form 8-K........................................................ 13
(a) Exhibits........................................................................... 13
(b) Reports on Form 8-K................................................................. 13
SPECTRUMEDIX CORPORATION
CONDENSED BALANCE SHEETS
ASSETS
December 31, March 31,
2000 2000
---------- ----------
(Unaudited) (Note 1)
CURRENT ASSETS:
Cash and cash equivalents $ 233,962 $2,183,458
Accounts receivable 641,391 181,137
Inventories 958,902 617,191
Prepaid expenses 39,411 14,642
---------- ----------
TOTAL CURRENT ASSETS 1,873,666 2,996,428
---------- ----------
Property and equipment, net 563,509 475,855
Patent fees 593,706 490,902
License and license options, net of accumulated - 20,525
amortization of $142,200 and $121,675 respectively
Security deposit 8,479 8,479
---------- ----------
TOTAL ASSETS $3,039,360 $3,992,189
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,872,105 $ 1,719,278
Current portion of long-term capital lease obligations 59,957 37,915
Customer Deposit 99,000 -
Current portion of deferred revenue 666,667 1,238,096
------------ ------------
TOTAL CURRENT LIABILITIES 2,697,729 2,995,289
------------ ------------
Long-term capital lease obligations, net of current portion 154,683 83,222
Deferred revenue, net current portion 388,889 888,889
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.00115 par value, 2,000,000 shares
authorized at December 31, 2000 and March 31, 2000
Series A Preferred stock, 2,000 shares issued and outstanding at 2 2
December 31, 2000 and March 31, 2000 (liquidation preference of
$2,000,000)
Series B Preferred stock, 225.968 and 103.125 shares issued and - -
outstanding at December 31, 2000 and March 31, 2000,
respectively (liquidation preference of $225,968 and $103,125,
respectively)
Common stock, $.00115 par value, 23,000,000 shares 4,930 4,877
authorized 4,288,266 and 4,241,989 shares issued and
outstanding at December 31 and March 31, 2000,
respectively
Note receivable arising from issuance of common stock (37,500) (37,500)
Additional paid-in capital 12,854,057 12,498,434
Deferred compensation (4,286) -
Accumulated deficit (13,019,144) (12,441,024)
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TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (201,941) 24,789
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 3,039,360 $ 3,992,189
============ ============
See notes to condensed financial statements.
1
SPECTRUMEDIX CORPORATION
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE AND THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999
Nine Months Ended Three Months Ended
December 31, December 31,
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2000 1999 2000 1999
---------- ----------- ----------- -----------
SALES $1,121,116 $ 107,523 $ 819,477 $ 11,803
SUBLICENSE AND CONSULTING REVENUE 1,488,096 277,778 416,667 166,667
---------- ----------- ---------- ----------
2,609,212 385,301 1,236,144 178,470
COST OF SALES 1,110,906 284,734 583,931 127,472
---------- ----------- ---------- ----------
GROSS PROFIT 1,498,306 100,567 652,213 50,998
---------- ----------- ---------- ----------
OPERATING EXPENSES:
Research and development costs, net 598,673 486,590 95,529 126,721
General and administrative expenses 1,499,933 701,581 486,958 239,861
---------- ----------- ---------- ----------
TOTAL OPERATING EXPENSES 2,098,606 1,188,171 582,487 366,582
---------- ----------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (600,300) (1,087,604) 69,726 (315,584)
---------- ----------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income 50,630 57,875 7,600 32,551
Interest expense (28,450) (27,873) (22,867) (4,077)
---------- ----------- ---------- ----------
TOTAL OTHER INCOME (EXPENSE) 22,180 30,002 (15,267) 28,474
---------- ----------- ---------- ----------
NET INCOME (LOSS) $ (578,120) $(1,057,602) $ 54,459 $ (287,110)
========== =========== ========== ==========
NET INCOME (LOSS) PER SHARE:
Basic $(.14) $(.29) $.013 $(.08)
========== =========== ========== ==========
Diluted $(.14) $(.29) $.007 $(.08)
========== =========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic 4,266,078 3,646,166 4,267,712 3,658,041
========== =========== ========== ==========
Diluted 4,266,078 3,646,166 7,327,088 3,658,041
========== =========== ========== ==========
See notes to condensed financial statements.
2
SPECTRUMEDIX CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended
December 31,
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (578,120) $(1,057,602)
Adjustments to reconcile net loss to net cash (used) by operating activities:
Depreciation and Amortization 118,136 97,392
Non-cash compensation expense 349,299 106,084
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (460,253) 26,512
(Increase) decrease in inventories (341,711) (54,402)
(Increase) decrease in prepaid expenses (24,769) -
(Increase) in other assets - (13,113)
Increase in accounts payable and accrued expenses 152,828 (938,764)
Increase in customer deposit 99,000 -
Increase (decrease) in deferred revenue (1,071,429) 2,722,222
----------- -----------
NET CASH PROVIDED (USED BY) OPERATING ACTIVITIES (1,757,019) 888,329
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures and patent costs (160,719) (134,026)
Reimbursement of license costs - 52,815
Increase in Certificates of Deposit - (2,041,638)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (160,719) (2,122,849)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long term obligations (33,851) -
Proceeds from officer's notes - 222,031
Repayment of officer's notes - (300,000)
Repayment of note payable-others - (21,517)
Proceeds from sale of Preferred Stock - 1,995,000
Stock options exercised 2,093 -
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (31,758) 1,895,514
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,949,496) 660,994
CASH AND CASH EQUIVALENTS - beginning of period 2,183,458 20,318
----------- -----------
CASH AND CASH EQUIVALENTS - end of period $ 233,962 $ 681,312
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Series B Preferred Stock issued in lieu of payment on promissory note 122,843 -
Capital lease obligations incurred for acquisition of equipment 127,351 -
See notes to condensed financial statements.
3
SPECTRUMEDIX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited)
DECEMBER 31, 2000
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of SpectruMedix
Corporation (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
the instructions to Form 10-QSB. Accordingly, they do not contain all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, the accompanying unaudited financial statements contain all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly (a) the financial position of the Company as of December 31,
2000, (b) the results of operations of the Company for the nine and three
months ended December 31, 2000 and 1999 and (c) changes in cash flows of
the Company for the nine months ended December 31, 2000 and 1999. Financial
results for the interim period ended December 31, 2000 may not be
indicative of the financial results for the fiscal year ending March 31,
2001.
The balance sheet at March 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
For more information, refer to the audited financial statements for the
fiscal year ended March 31, 2000, which were included in the Company's
Annual Report on Form 10-KSB for the year ended March 31, 2000.
Certain reclassifications have been made to the 1999 financial statements
to conform to the 2000 presentation. These reclassifications had no effect
on net income as previously reported.
NOTE 2 - GENERAL
The Company manufactures and markets high-speed DNA/gene sequencing
instrumentation (the "DNA Sequencer") and high throughput screening,
massive parallel capillary electrophoresis systems (the "HTS-MPCE system").
The DNA Sequencer is an instrument for the acquisition, analysis and
management of complex genetic information, and the HTS-MPCE system is a
high throughput screening instrument primarily used by the pharmaceutical
industry for drug discovery.
NOTE 3 - ECONOMIC DEPENDENCY
On March 31, 2000, the Company sold its first HTS-MPCE system. For the nine
months ended December 31, 2000, the Company sold three DNA Sequencers and
two HTS-MPCE systems, with two DNA Sequencers and one HTS-MPCE system being
sold during the three months ended December 31, 2000. In addition, one DNA
Sequencer has been leased with an option to purchase, which lease term has
been extended through January 2001. The Company expects that sales of the
DNA Sequencer and HTS-MPCE system will continue to be characterized by
sales to a limited number of customers during any accounting period, with
each sale being material to the Company's results of operations and
financial condition.
The Company's DNA Sequencer and HTS-MPCE system require high quality raw
materials and components that the Company purchases from third-party
suppliers. Certain raw materials or components may, however, from time to
time, be difficult to obtain, which difficulties may result in production
delays or require the Company to find alternate means of production. In
particular, both the lasers and capillaries used in the DNA Sequencer and
HTS-MPCE system are each purchased from one manufacturer who only produces
a limited number of units. Such manufacturers may not be able to supply all
of the Company's needs. The Company does not currently maintain supply
agreements with any of its suppliers. The Company believes adequate sources
of supply exist for all raw materials and components it currently needs,
and that such items are available on commercially reasonable terms.
4
NOTE 4 - LEGAL PROCEEDINGS
Rubin Matter
On April 21, 1997, a complaint was filed in the Supreme Court of the State
of New York alleging breach of contract. Specifically, the plaintiff
alleged that the Company defaulted under a promissory note issued to
plaintiff on May 16, 1996 in the amount of $175,000 (the "Rubin Note") and
that the Company is liable and indebted to plaintiff in the principal
amount of $175,000, together with interest and expenses. The Company, on
May 2, 1997, paid the principal and interest due under the Rubin Note.
The main remaining issue asserted by the plaintiff is whether, pursuant to
an alleged related agreement, the plaintiff is entitled to 152,174 shares
(adjusted to reflect stock splits) of common stock, par value $.00115 per
share, of the Company (the "Common Stock") or, alternatively, $875,000.
Plaintiff alleges that the Company undertook to enter into a securities
purchase agreement pursuant to which he should have received the
aforementioned shares of Common Stock. The Company contends that such
securities purchase agreement was never discussed and no agreement was
reached with respect to the terms thereof. Such purported securities
purchase agreement was not signed by either of the parties to the Rubin
Note. The Company believes that it has meritorious defenses to the above-
described claims and it intends to defend the litigation vigorously.
However, due to the nature of litigation and because the lawsuit is in the
initial stages, the Company cannot determine the total expense or possible
loss, if any, that may ultimately be incurred either in the context of a
trial or as a result of a negotiated settlement. While management believes
that the resolution of this matter will not have a material adverse effect
on the Company's business, financial condition and results of operations,
the results of these proceedings are uncertain and there can be no
assurance to that effect.
NOTE 5 - STOCK OPTIONS
During the three months ended December 31, 2000, options to purchase 7,260
shares of Common Stock, which options were granted pursuant to the
Company's stock incentive plan, were exercised.
On January 13, 2000, the Company amended and restated the promissory note
it issued to Dr. Joseph K. Adlerstein, the Company's President and Chief
Executive Officer, in respect of amounts advanced by Dr. Adlerstein to the
Company since December 1998. Dr. Adlerstein advanced funds to the Company
to pay payroll and for other working capital purposes at a time when the
Company did not have sufficient funds to meet its expenses and could not
obtain capital from any other sources. The amended note extended the term
of the loans to December 31, 2000 and provided that each $1,000 of
principal amount and accrued but unpaid interest outstanding under the
amended note may be converted into one share of the Company's Series B
Preferred Stock. On December 31, 2000, Dr. Adlerstein converted all
outstanding principal and accrued interest under the note, which totaled
$122,845, into 122.843 shares of the Company's Series B Preferred Stock.
On January 13, 2000, Dr. Adlerstein was granted an option to purchase
100,000 shares of Common Stock with an exercise price of $.125 per share,
the closing price of the Common Stock on January 13, 2000. The vesting of
the options was dependent upon meeting certain performance criteria in
calendar year 2000. Certain of the performance criteria were met, and the
options vested with respect to 66,666 shares of Common stock, of which
33,333 shares vested in the three months ended December 31, 2000.
In December 2000, the Company granted options to purchase 407,652 shares of
Common Stock to employees under the SpectruMedix Corporation stock
incentive plan at an exercise price of $0.75 per share, the closing price
of the Common Stock on the date of grant. The options vest in four
tranches, with the first tranche vesting in December 2001. The stock
options are exercisable for a period of ten years from the date of grant.
In December 2000, the Company granted 10,750 shares of Common Stock to the
two non-employee members of its Board of Directors, which grant was in lieu
of $8,063 in fees payable to such directors.
5
NOTE 6 - RESTRICTED STOCK
During the three months ended December 31, 2000, the Company granted 5,000
shares of restricted stock with a fair market value of approximately $5,000
at the time of grant. The restricted stock vests in full on June 30, 2001.
NOTE 7 - NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share:
Nine months ended December 31,
--------------------------------
2000 1999
--------------------------------
Numerator:
Net loss $ (578,120) $(1,057,602)
===============================
Denominator:
Weighted-average shares 4,266,078 3,646,166
===============================
Net loss per share, basic and diluted $ (0.14) $ (0.29)
===============================
Antidilutive options, warrants, and convertible preferred stock
not included in loss per share calculation 6,090,270 3,495,408
===============================
Three months ended December 31,
---------------------------------
2000 1999
---------------------------------
Numerator for basic and diluted income (loss) per share:
Net income (loss) $ 54,459 $ (287,110)
===============================
Denominator:
Denominator for basic income per share weighted-average shares 4,267,712 3,658,041
===============================
Effect of dilutive securities:
Warrants/options 451,193 -
Other 439 -
Assumed conversion of Preferred Stock 2,607,744 -
-------------------------------
Dilutive potential common shares
Denominator for diluted income per share-adjusted 3,059,376 -
-------------------------------
Weighted-average shares and assumed conversions 7,327,088 3,658,041
===============================
Basic net income (loss) per share $ 0.013 $ (0.08)
===============================
Diluted net income (loss) per share $ 0.007 $ (0.08)
===============================
Antidilutive options, warrants, and convertible preferred stock
not included in loss per share calculation - 3,495,408
===============================
6
Note 8 - Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which
provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements filed with the SEC. SAB 101 outlines the
basic criteria that must be met in order to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. In June
2000, the SEC issued SAB 101B, "Second Amendment: Revenue Recognition in
Financial Statements," which extends the effective date of SAB 101 to the
fourth fiscal quarter of fiscal years commencing after December 15, 1999.
Management has made an initial assessment of the implication of SAB 101 and
does not believe the adoption of the statement will have a significant
impact on our financial position, results of operations, or cash flows.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
SpectruMedix Corporation's (the "Company") Condensed Financial Statements and
Notes thereto included elsewhere in this Quarterly Report on Form 10-QSB.
Except for the historical information contained herein, the discussion in this
Quarterly Report contains certain forward-looking statements, within the meaning
of Section 27A of the Securities Act and Section 27E of the Exchange Act, that
involve risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. Forward-looking statements are based
on management's current expectations and are subject to a number of risks and
uncertainties that could cause actual results to differ materially from expected
results. The cautionary statements made in this Quarterly Report should be read
as being applicable to all related forward-looking statements wherever they
appear in this Quarterly Report. Factors that could cause or contribute to such
differences include, the ability of the Company to effectively market its DNA
sequencer and high throughput screening, massive parallel capillary
electrophoresis system, the ability of the Company to enter into distributor
relationships, the availability of the necessary capital to fund the Company's
plans, and the availability of specialized components necessary to manufacture
the DNA Sequencer, as well as those factors discussed under the heading "Risk
Factors" and elsewhere herein.
Overview
The Company devotes substantially all of its resources and efforts to the
marketing and sale of its two principal products, its high-speed DNA/gene
sequencing instrumentation (the "DNA Sequencer") and its high throughput
screening, massive parallel capillary electrophoresis system (the "HTS-MPCE
system"). The DNA Sequencer is an instrument for the acquisition, analysis and
management of complex genetic information, and the HTS-MPCE system is a high
throughput screening instrument primarily used by the pharmaceutical industry
for drug discovery. The DNA Sequencer was developed in part from research
efforts conducted at the United States Department of Energy's Ames Laboratory,
which is operated by Iowa State University's Institute for Physical Research and
Technology, and the HTS-MPCE system is based on the technologies developed for
the DNA Sequencer.
In the Fall of 1999, the Company completed the development and commercialization
of its DNA Sequencer and began a directed marketing effort, and the Company
developed and commercialized the HTS-MPCE system. On March 31, 2000, the
Company sold its first HTS-MPCE system. From April 1, 2000 through December 31,
2000, the Company sold three DNA Sequencers and two HTS-MPCE systems, with two
DNA Sequencers and one HTS-MPCE system being sold in the three months ended
December 31, 2000. Although the Company has sold a number of DNA Sequencers and
HTS-MPCE systems and reported net income for the most recently completed fiscal
quarter, the Company is still dependent on its sublicense fee income and the
funds it received in connection with its transactions with PE Biosystems
(discussed below) in order to fund its operations and meet its obligations. In
order to further develop and expand the business, the Company will have to
obtain additional funds by means equity or debt financing. There can be no
assurance that such funds will be available on terms acceptable to the Company,
if at all.
History
In May 1995, the Company entered into an agreement with Iowa State University
Research Foundation ("ISURF"), an affiliate of Ames Laboratories. Under that
agreement the Company received an option to acquire an exclusive worldwide
license to technology for the commercial development of the DNA Sequencer
developed at ISURF. The Company believes its DNA Sequencer is capable of
substantially increasing the rate of sequencing over the other commercially
available sequencing instruments on the market today and providing reliable
results at a lower cost.
In June 1997, the Company exercised its option for the ISURF technology and
entered into an exclusive, worldwide licensing agreement. Due to the Company's
financial condition during the 1999 fiscal year and through the end of July
1999, however, the Company was not able to make certain required payments under
the licensing agreement. On July 30, 1999, the Company and ISURF amended the
license agreement to require the Company to pay $500,000 to ISURF, in exchange
for which ISURF waived any defaults for the Company's past failure to make
required payments. The amended agreement also provided for a revised schedule
of minimum royalties. In addition, ISURF allowed the Company to grant a
sublicense to The Perkin-Elmer Corporation, now known as PE Biosystems, in
exchange for a portion of the royalties the Company receives from PE Biosystems
and a phantom stock award equal to 150,000 shares of the Company's common stock.
8
Concurrently with the restructuring of the license agreement, the Company
granted PE Biosystems an exclusive sublicense to use certain patents for DNA
sequencing machines, with the sublicense limited to machines using 30 or fewer
capillaries and side entry illumination. The Company also granted PE Biosystems
a right of first refusal to sublicense this technology to develop DNA sequencing
machines using more than 30 capillaries. On July 30, 1999, PE Biosystems paid
the Company a non-refundable sublicense issue fee of $1,000,000, and agreed to
pay the Company certain minimum annual royalties commencing with the twelve-
month period beginning August 1, 2000. The minimum royalties are non-
refundable, but are credited against the earned royalties payable pursuant to
the sublicense agreement.
In connection with the sublicense agreement, PE Corporation, the parent company
of PE Biosystems, purchased 2,000 shares of the Company's Series A Preferred
Stock for $1,000 per share. The Company will pay dividends on the Series A
Preferred Stock only if the Company pays dividends on its common stock. The
Series A Preferred Sock may be converted into shares of the Company's common
stock at a conversion price of $2.50 per share, subject to adjustment in the
event of a consolidation, merger, reorganization or sale of substantially all of
the Company's assets. In addition, the Company entered into a multi-year
consulting agreement with PE Biosystems pursuant to which the Company will
provide consulting services to PE Biosystems. Upon execution of the consulting
agreement, the Company received a lump sum consulting fee of $2,000,000.
Results of Operations - Nine Months Ended December 31, 2000 and 1999
The Company had total sales of $1,121,116 and $107,523 for the nine months ended
December 31, 2000 and 1999, respectively. The increase in sales of $1,013,593,
or approximately 943%, was due primarily to the sale of DNA Sequencer and HTS-
MPCE systems during the nine months ended December 31, 2000, and the sale of
approximately $148,138 of the Company's other products. During the nine months
ended December 31, 1999, the Company was still in the process of developing the
DNA Sequencer and the HTS-MPCE system and sales for that period reflect only
sales of mass spectrometer components, Luminoscopes and other products. The
Company is no longer devoting its resources to the development and marketing of
such products.
In addition to its sales revenue, the Company recorded sublicense and consulting
revenue of $1,488,096 and $277,778 for the nine months ending December 31, 2000
and 1999, respectively, relating to the sublicense and consulting agreements
that the Company entered into in July 1999 with PE Biosystems.
Research and development expenses increased $112,083 or 23% in 2000 to $598,673
from $486,590 in 1999. The Company's research and development expenses in 2000
increased due to salary and benefit costs of the additional personnel hired in
this area and the reduction in funds received from research grants. The research
and development expenses for the nine months ended December 31, 2000 and 1999
are net of research grants of $214,207 and $328,346, respectively. Such grants
offset the research and development expenses borne by the company.
General and administrative expenses were $1,499,933 and $701,581 during the nine
months ended December 31, 2000 and 1999, respectively, an increase of $798,352,
or approximately 114%. Approximately 61% and 55% of general and administrative
expenses for the nine months ended December 31, 2000 and 1999, respectively,
were attributable to payroll, payroll taxes, employee benefits and professional
and consulting services. The increase was due primarily to the hiring of a
national sales director and other administrative staff in April 2000 and an
increase in legal and accounting expenses.
Interest expense of $28,450 and $27,873 for the nine months ended December 31,
2000 and 1999, respectively, resulted from borrowings. Interest expense
increased $577 or approximately 2% in 2000 as a result of marginally higher
borrowings.
Interest income decreased $7,245 to $50,630 in 2000 from $57,875 in 1999 as a
result of the decrease in cash deposits.
Results of Operations - Three Months Ended December 31, 2000 and 1999
The Company had total sales of $819,477 and $11,803 for the three months ended
December 31, 2000 and 1999, respectively. The increase in sales of $807,674, or
approximately 6,843%, was due primarily to the sale of two DNA Sequencers and
one HTS-MPCE system during the three months ended December 31, 2000, and the
sale of approximately $103,614 of the Company's other products. During the three
months ended December 31, 1999, the Company devoted almost all of its efforts to
the development of the DNA Sequencer and the HTS-MPCE system
9
and sales for that period reflect sales of mass spectrometer components,
Luminoscopes and other products. The Company is no longer devoting its resources
to the development and marketing of such products.
In addition to its sales revenue, the Company recorded sublicense and consulting
revenue of $416,667 and $166,667 for the three months ending December 31, 2000
and 1999, respectively, relating to the sublicense and consulting agreements
that the Company entered into in July 1999 with PE Biosystems.
Research and development expenses decreased $31,192 or 25% in 2000 to $95,529
from $126,721 in 1999. The research and development expenses for the three
months ended December 31, 2000 and 1999 are net of research grants of $214,207
and $112,955, respectively. Such grants offset the research and development
expenses borne by the company.
General and administrative expenses were $486,958 and $239,861 during the three
months ended December 31, 2000 and 1999, respectively, an increase of $247,097,
or approximately 103%. Approximately 64% and 55% of general and administrative
expenses for the three months ended December 31, 2000 and 1999, respectively,
were attributable to payroll, payroll taxes, employee benefits and professional
and consulting services. The increase was due primarily to the hiring of a
national sales director and other administrative staff in April 2000 and an
increase in legal and accounting expenses.
Interest expense of $22,867 and $4,077 for the three months ended December 31,
2000 and 1999, respectively, resulted from borrowings. Interest expense
increased primarily as a result of interest payable to Dr. Joseph Adlerstein,
the Company's President and Chief Executive Officer, in respect of amounts
advanced by Dr. Adlerstein to the Company from December 1998, a time when the
Company could not secure financing from other sources. Such advances were used
to pay payroll and for other working capital purposes. In December 2000, Dr.
Adlerstein converted all amounts due to him into shares of the Company's Series
B Preferred Stock.
Interest income decreased $24,951 to $7,600 in 2000 from $32,551 in 1999 as a
result of the decrease in cash deposits.
Net Income
Net income for the three months ended December 31, 2000 was $54,459
as compared to a loss of $287,110 for the comparable period in the prior year.
Liquidity and Capital Resources
On July 30, 1999, the Company restructured its license agreement with ISURF for
technology used to develop the Company's DNA Sequencer and entered into a
sublicense agreement relating to certain of such technology with PE Biosystems.
In connection with the sublicense agreement, PE Biosystems made an investment in
the Company. PE Biosystems also retained the Company as a consultant.
The Company has funded its operations from the aggregate $5,000,000 in gross
proceeds received July 30, 1999 from the sublicense and sale of preferred stock
with PE Biosystems, and other agreements, as well as the revenues from its
products. Such funds have been used to pay amounts owing under its agreements
with ISURF and to marketing and manufacturing the DNA Sequencer and HTS-MPCE
system. Although the Company has sold a number of DNA Sequencers and HTS-MPCE
systems and reported net income for the three months ended December 31, 2000,
the Company is still dependent on its sublicense fee income and the funds it
received in connection with its transactions with PE Biosystems in order to fund
its operations and meet its obligations.
The Company believes that the amounts payable to the Company by PE Biosystems
will be sufficient to pay amounts payable to ISURF under the license agreements
and meet certain other obligations, but the Company must generate significantly
more product sales or obtain additional capital in order to fund its operations
past March 31, 2001.
In addition to its immediate cash needs, in order to further develop and expand
the business in accordance with its plans, the Company anticipates that it will
need significant additional capital in the near term year to expand its
manufacturing capabilities, launch a substantial sales and marketing program,
pay various required license and milestone fees, establish third-party
collaborations and pursue additional research and development. If the Company is
unable to generate significant sales of its core products, it must obtain
additional debt or equity financing. There can be no assurance, however, that
the Company will be able to obtain such financing on terms acceptable to it.
10
In September 2000, the Company was awarded a Phase II Small Business Innovation
Research (SBIR) grant from the National Heart, Lung, and Blood Institute at the
National Institutes of Health. The $750,000 grant was awarded to support the
development of a "Rapid, Automated Method for MIGET by Mass Spectrometry." In
addition, in October 2000, the National Human Genome Research Institute at the
National Institutes of Health awarded the Company a grant to further develop and
test a 384-capillary DNA sequencing instrument. The twelve-month grant provides
for the reimbursement of $700,000 of direct research and development costs and
an additional amount for indirect costs. These grants will be used to offset
research and development costs incurred by the Company.
The Company's capital requirements depend on many factors, including the status
of the development of its products, obtaining manufacturing capabilities to
produce its products in volume, prosecuting and enforcing its intellectual
property rights, completing technological and market developments, and the
ability of the Company to develop new collaborative and licensing arrangements.
11
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
Robert M. Rubin v. SpectruMedix Corporation et. al. On April 21, 1997, a
complaint was filed in the Supreme Court of the State of New York alleging
breach of contract. Specifically, the plaintiff alleges that the Company
defaulted under a promissory note issued to plaintiff on May 16, 1996 in the
amount of $175,000 (the "Rubin Note") while such Note was outstanding and
therefore that the Company is liable and indebted to plaintiff in the principal
amount of $175,000, together with interest and expenses. The Company, on May
2,1997, paid the principal and interest due under the Rubin Note. The main
remaining issue asserted by the plaintiff is whether, pursuant to an alleged
related agreement, the plaintiff is entitled to 152,174 shares (adjusted to
reflect stock splits) of Common Stock or, alternatively, $875,000. Plaintiff
alleges that the Company undertook to enter into a securities purchase agreement
pursuant to which he should have received the aforementioned shares of Common
Stock. The Company contends that such securities purchase agreement was never
discussed and therefore that no agreement was reached with respect to the terms
thereof. Such securities purchase agreement was not signed by either of the
parties to the Rubin Note. The Company believes that it has meritorious defenses
to the above-described claims and it intends to defend the litigation
vigorously. However, due to the nature of litigation and because the lawsuit is
in the initial stages, the Company cannot determine the total expense or
possible loss, if any, that may ultimately be incurred either in the context of
a trial or as a result of a negotiated settlement. While management believes
that the resolution of this matter will not have a material adverse effect on
the Company's business financial condition and results of operations, the
results of these proceedings are uncertain and there can be no assurance to that
effect. Regardless of the ultimate outcome of the litigation, it could result in
significant diversion of time by the Company's personnel.
ISURF Arbitration. On January 30, 2001, the Company commenced an arbitration
proceeding against ISURF in connection with a dispute concerning the parties'
respective rights and obligations under their June 24, 1997 License Agreement,
as amended (the "Agreement"). Among other things, the Company alleges that
ISURF breached its obligations under the Agreement by failing to offer to
license certain improvements in the licensed technology to the Company and by
licensing such improvements to others. The Company seeks to recover damages
incurred as a result of ISURF's breaches. ISURF has claimed that the Company
also is in breach of the Agreement, which the Company disputes. The Company
believes that it has meritorious claims and that the ISURF claim lacks any
merit. There can be no assurance, however, that the Company will be successful
in the arbitration.
Other than the foregoing, the Company is not a party to any other material
legal proceedings.
Item 2. Changes in Securities and Use of Proceeds.
-----------------------------------------
On December 31, 2000, Dr. Adlerstein, the Company's President and Chief
Executive Officer, converted $122,843 outstanding under the note made by the
Company in favor of Dr. Adlerstein into 122.843 shares of the Company's Series B
Preferred Stock. In January 2000, Dr. Adlerstein converted $103,125 outstanding
under the note into 103.125 shares of Series B Preferred Stock. The note was
made in respect of amounts advanced to the Company from time to time by Dr.
Adlerstein from December 1998.
The Series B Preferred Stock has a liquidation preference of $1,000 per
share and rank junior to the Series A Preferred Stock in the event of a
dissolution of the Company. Each share of Series B Preferred Stock is
convertible into 8,000 shares of Common Stock, subject to adjustment for stock
splits, reclassifications and recombinations. Except as otherwise required by
law, the Series B Preferred Stock votes together with the Common Stock and each
share of Series B Preferred Stock is entitled to 80,000 votes per share, subject
to adjustment for stock splits, reclassifications and recombinations.
Item 3. Defaults Upon Senior Securities. None.
--------------------------------
Item 4. Submission of Matters to a Vote of Security Holders. None.
----------------------------------------------------
Item 5. Other Information. None.
-----------------
12
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
--------
The following documents are referenced or included in this report:
Exhibit No.
-----------
27 Financial Data Schedule.
(b) Reports on Form 8-K.
-------------------
No Current Reports on Form 8-K were filed with the Commission during
the quarter ended December 31, 2000.
13
SIGNATURES
----------
In accordance with the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed in its
behalf by the undersigned thereunto duly authorized.
SPECTRUMEDIX CORPORATION
DATED: February 14, 2001 By: /s/ Joseph K. Adlerstein
-------------------------
Joseph K. Adlerstein
President, Chief Executive Officer and
Chairman of the Board (Principal Executive and
Accounting Officer)
14
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
27 Financial Data Schedule.
15