U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ____________ to ____________
Commission file number 0-13092
SPECTRASCIENCE, INC.
(Exact name of small business issuer
as specified in its charter)
MINNESOTA 41-1448837
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
3650 ANNAPOLIS LANE, SUITE 101
MINNEAPOLIS, MINNESOTA 55447-5434
(Address of principal executive offices)
(612) 509-9999
(Issuer's telephone number, including area code)
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 _____
The number of shares of the Registrant's common stock, par value $.25,
outstanding on November 5, 1996 was 3,618,212.
Transitional Small Business Disclosure Format (Check one): Yes ____ No __X__
SPECTRASCIENCE, INC.
FORM 10-QSB
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
INDEX
PAGE NO.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
<S> <C>
Balance Sheets -- September 30, 1996 and December 31, 1995 3
Statements of Operations -- Three months Ended September 30, 1996 and 1995
Nine months Ended September 30, 1996 and 1995 4
Statements of Cash Flows -- Nine months Ended September 30, 1996, and 1995 5
Notes to Financial Statements -- September 30, 1996 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 6
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 9
ITEM 2. CHANGES IN SECURITIES 9
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
ITEM 5. OTHER INFORMATION 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 9
SIGNATURES 10
</TABLE>
PART I -- FINANCIAL INFORMATION
SPECTRASCIENCE, INC.
FORM 10-QSB
<TABLE>
<CAPTION>
BALANCE SHEETS
September 30, December 31,
1996 1995
------------ ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,322,385 $ 4,123,326
Accounts receivable - 100,641
Inventory 198,979 181,871
Other current assets 107,947 80,197
------------ ------------
Total current assets 3,629,311 4,486,035
Net fixed assets 225,020 158,230
------------ ------------
TOTAL ASSETS $ 3,854,331 $ 4,644,265
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 113,241 $ 150,278
Accrued compensation and taxes 20,636 74,328
Accrued expenses 129,661 30,058
------------ ------------
Total current liabilities 263,538 254,664
Commitments
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per share
Authorized shares--20,000,000
Convertible preferred stock, Series A:
Authorized shares--5,000,000
Issued and outstanding shares--
66,667 on September 30, 1996 and
674,998 on December 31, 1995 66,667 674,998
Convertible preferred stock, Series B:
Authorized shares--1,000,000
Issued and outstanding shares--792,500 792,500 792,500
Common stock, $.25 par value:
Authorized shares--10,000,000
Issued and outstanding shares--
3,618,212 on September 30, 1996 and
2,933,348 on December 31, 1995 904,554 733,337
Additional paid-in capital 43,872,689 43,136,284
Accumulated deficit (42,045,617) (40,947,518)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 3,590,793 4,389,601
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 3,854,331 $ 4,644,265
============ ============
NOTE: THE BALANCE SHEET AT DECEMBER 31, 1995 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.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
<TABLE>
<CAPTION>
SPECTRASCIENCE, INC.
FORM 10-QSB
STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------------- -----------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ -- $ 18,563 $ -- $ 184,652
Cost of products sold -- 16,768 -- 124,913
----------- ----------- ----------- -----------
Gross profit -- 1,795 -- 59,739
Operating expenses
Research and development 249,769 240,095 718,760 559,706
Selling, general and
administrative 167,428 154,969 519,357 452,298
----------- ----------- ----------- -----------
Total operating expenses 417,197 395,064 1,238,117 1,012,004
Interest and other income 43,601 7,134 140,018 1,468
----------- ----------- =========== ===========
Net loss $ (373,596) $ (386,135) $(1,098,099) $ (950,797)
=========== =========== =========== ===========
Net loss per common share $ (0.10) $ (0.13) $ (0.35) $ (0.33)
Weighted average common
shares outstanding 3,560,006 2,873,348 3,161,746 2,841,553
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
SPECTRASCIENCE, INC.
FORM 10-QSB
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOW (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,098,099) $ (950,797)
Adjustments to reconcile net cash
used in operating activities:
Depreciation 53,818 37,828
Recognition of deferred income -- (26,000)
Non-cash interest expense -- 3,260
Disposal of other assets -- 37,444
Gain on sale of equipment -- (300)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 100,639 (170,053)
(Increase) decrease in inventories (17,106) (1,043)
(Increase) decrease in other current assets (27,750) (15,380)
(Decrease) in current liabilities (39,814) (87,999)
----------- -----------
Net cash used in operating activities (1,028,312) (1,173,040)
INVESTING ACTIVITIES
Purchase of fixed assets (120,608) (1,802)
Proceeds from sale of fixed assets -- 300
----------- -----------
Net cash used in investing activities (120,608) (1,502)
FINANCING ACTIVITIES
Proceeds from issuance of notes payable 48,688 225,000
Proceeds from issuance of common stock 907,622 225,000
Proceeds from issuance of preferred stock (608,331) 1,440,000
----------- -----------
Net cash provided by financing activities 347,979 1,890,000
----------- -----------
Net (decrease) increase in cash and
cash equivalents (800,941) 715,458
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 4,123,326 58,298
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 3,322,385 $ 773,756
=========== ===========
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
SPECTRASCIENCE, INC.
FORM 10-QSB
SEPTEMBER 30, 1996
NOTES TO FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of
SPECTRASCIENCE, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three- and nine-month periods ended September 30, 1996
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. These statements should be read in conjunction with the
financial statements and related notes which are incorporated by reference in
the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Refer to Exhibit 99 of the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1996, for certain important cautionary factors,
risks and uncertainties related to forward-looking statements.
(a) BUSINESS
SPECTRASCIENCE, Inc. (the "Company"), is a market-driven company which
utilizes its expertise in the underlying core technologies of spectroscopy,
fiber optics, computer software and hardware, and minimally-invasive medical
delivery systems to design, develop, manufacture and market medical products for
the diagnosis and facilitation of treatment of a broad range of human diseases.
The Company currently has two products that are in the testing and development
stages: the Optical BiopsyTM System, which is targeted for the detection and
differentiation of cancerous, pre-cancerous and healthy tissues; and the
Spectroscopic GuidewireTM System which is targeted for the detection of
intracoronary thrombus and differentiation of atherosclerotic plaque.
The Company was incorporated in the State of Minnesota on May 4, 1983
as GV Medical, Inc. The Company changed its name to SPECTRASCIENCE, Inc. on
October 16, 1992. The Company's common stock, par value $.25 (the "Common
Stock"), is traded on the NASDAQ Small-Cap Market under the symbol SPSI.
(b) RESULTS OF OPERATIONS
The Company recorded no revenue for the three and nine months ended
September 30, 1996 compared to $18,563 and $184,652 for the same periods in
1995. Revenue for the three months ended September 30, 1995 reflected the sales
of disposables, while revenue for the nine months ended September 30, 1995
reflected the first international sales of the Company's Spectroscopic
Guidewire(TM) System and disposable products.
Cost of products sold for the three and nine months ended September 30,
1996 were therefore $0, compared to $16,768 and $124,913 for the same periods in
1995. As a result, gross profit for the three and nine months ended September
30, 1996 were $0 compared to $1,795 or 9.7% of sales and $59,739 or 32.4% of
sales for the same periods in 1995.
Research and development ("R&D") expenses for the three months ended
September 30, 1996 increased by $9,674 or 4.0% to $249,769, compared to $240,095
for the three months ended September 30, 1995. This was mainly due to the
increase in consulting expenses which amounted to approximately $50,000 per
quarter, and additional expenses of an Optics Engineer. The Company intends to
continue the services of these consultants who provide specific expertise in
product design and development, regulatory strategies and clinical studies,
while maintaining a low employee head-count. R&D expenses for the nine months
ended September 30, 1996 increased by $159,054 or 28.4% to $718,760 compared to
$559,706 for the nine months ended September 30, 1995. This increase was
primarily due to legal expenses associated with the filing of patent
applications and expenses related to clinical trials and clinical research
agreements.
Selling, general and administrative ("SG&A") expenses for the three
months ended September 30, 1996 increased by $12,459 or 8.0% to $167,428,
compared to $154,969 for the three months ended September 30, 1995. This was due
to increases in premiums for product liability insurance and directors and
officers insurance, and the hiring of a Chief Financial Officer. SG&A expenses
for the nine months ended September 30, 1996 increased by $67,059 or 14.8% to
$519,357, compared to $452,298 for the nine months ended September 30, 1995.
This was primarily due to expenses related to the filing of certain registration
statements with the Securities and Exchange Commission and the NASDAQ
application and listing fees.
Interest and other income for the three months ended September 30, 1996
increased by $36,467 or 511.2% to $43,601 compared to $7,134 for the three
months ended September 30, 1995. Interest income for the nine months ended
September 30, 1996 increased by $138,550 or 9,438.0% to $140,018 compared to
$1,468 for the nine months ended September 30, 1995. The increases for both the
three months and nine months ended September 30 were primarily due to a higher
balance in cash and cash equivalents.
Net losses for the three months ended September 30, 1996 decreased by
$12,539 or 3.3% to $373,596 from $386,135 for the three months ended September
30, 1995. The decrease in net losses was primarily due to higher interest
income. The net losses for the nine months ended September 30, 1996 increased by
$147,302 or 15.5% to $1,098,099 from $950,797 for the nine months ended
September 30, 1995. This was due to the lack of revenue and higher expenses
primarily associated with research and development, mitigated by higher interest
income. Consequently, the net losses per share for the three and nine months
ended September 30, 1996 were $.10 and $.35 compared to $.13 and $.33 for the
same periods in 1995.
(c) LIQUIDITY AND SOURCES OF CAPITAL
Cash and cash equivalents on September 30, 1996 was $3,322,385 compared
to $4,123,326 on December 31, 1995. The decrease in the cash position from
December 31, 1995 to September 30, 1996 was the result of the net loss generated
during the first nine months of 1996.
The working capital of the Company on September 30, 1996 was
$3,365,773, a decrease of $865,598 compared to $4,231,371 on December 31, 1995.
This decrease was primarily due to a reduction of the cash position and accounts
receivable.
Net cash used in operating activities for the nine months ended
September 30, 1996 was $1,028,312, a decrease of $144,728 compared to $1,173,040
for the same period in 1995. This decrease was primarily due to a reduction in
accounts receivable.
Net cash used in investing activities for the nine months ended
September 30, 1996 was $120,608, an increase of $119,106 compared to $1,502 for
the same period in 1995. This increase was due to the installation of two
spectroscopic consoles for clinical testing purposes.
Net cash provided by financing activities for the nine months ended
September 30, 1996 was $347,979, a decrease of $1,542,021 compared to $1,890,000
for the same period in 1995. The net cash provided for the nine months ended
September 30, 1996 was the result of stock option exercises in the first quarter
and warrant exercises in the third quarter. The net cash provided for the nine
months ended September 30, 1995 was the result of stock option exercises and the
completion of the private placement of 674,998 shares of Series A Preferred
Stock at $3.00 per share.
In the third quarter of 1996, 608,331 shares of Series A Preferred
Stock were converted to an equivalent number of shares of Common Stock, but no
cash was received as a result of this conversion. Warrants for 33,333 shares of
Common Stock at $5.00 per share also were exercised in the third quarter of
1996, which raised $166,665 for the Company. As a result of these activities,
the total number of shares of Common Stock outstanding increased to 3,618,212.
As of November 5, 1996 there were a total of 859,167 shares of convertible
preferred stock and 763,175 warrants outstanding.
SPECTRASCIENCE, INC.
FORM 10-QSB
SEPTEMBER 30, 1996
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
(a) MOVING OF COMPANY HEADQUARTERS
On November 1, 1996, the Company moved from its previous location at
5909 Baker Road, Minnetonka, Minnesota 55345, to a new facility located at 3650
Annapolis Lane, Suite 101, Minneapolis, Minnesota 55447-5434. The new telephone
number is 612/509-9999 and the new fax number is 612/509-9805. The Company
entered into a five-year lease agreement for this approximately 6,000 square
feet facility. Monthly lease expense for the current facility, including taxes
and maintenance, is $5,920, compared to $3,012 for the previous facility.
(b) 510(K) APPLICATION
The Company filed a 510(k) application with the the United States Food
and Drug Administration ("FDA") on August 30, 1996 for the approval of its
Optical Biopsy Forceps, which is intended for use in tissue biopsies in
gastrointestinal and urological applications. The Company anticipates that
approval from the FDA may be obtained in the first quarter of 1997.
(c) PATENT APPLICATION
The Company was notified by the United States Patent Office in October
1996 that all claims have been allowed for its patent application entitled
"System for Diagnosing Tissue with Guidewire." Such notification usually
precedes the actual approval and issuance of the patent within a few months;
however, until it is actually issued, there is no guarantee that such patent
will be approved.
(d) DIRECTOR OF REGULATORY AFFAIRS AND QUALITY ASSURANCE
The Company hired a Director of Regulatory Affairs and Quality
Assurance in the middle of September 1996, to assist the Company in implementing
quality programs and the submission of regulatory filings with the FDA and also
in international markets.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter
covered by this report.
SPECTRASCIENCE, INC.
FORM 10-QSB
SEPTEMBER 30, 1996
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPECTRASCIENCE, INC.
--------------------------------------
(Registrant)
NOVEMBER 8, 1996 /S/ BRIAN T. MCMAHON
- ----------------------- --------------------------------------
Date BRIAN T. MCMAHON
President and Chief Executive Officer
(Principal Executive Officer)
NOVEMBER 8, 1996 /S/ CHING-MENG CHEW
- ----------------------- --------------------------------------
Date CHING-MENG CHEW
Vice President of Finance and Administration
Chief Financial Officer, Secretary and Treasurer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,322,385
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 306,005
<CURRENT-ASSETS> 3,629,311
<PP&E> 800,745
<DEPRECIATION> 575,725
<TOTAL-ASSETS> 3,854,331
<CURRENT-LIABILITIES> 263,538
<BONDS> 0
0
859,167
<COMMON> 904,554
<OTHER-SE> 1,827,072
<TOTAL-LIABILITY-AND-EQUITY> 3,854,331
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 417,197
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (43,601)
<INCOME-PRETAX> (373,596)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (373,596)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> 0
</TABLE>
