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 JUNE 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)
5909 BAKER ROAD, SUITE 580,
MINNETONKA, MINNESOTA 55345
(Address of principal executive offices)
(612) 931-9000
(Issuer's telephone number)
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 August 12, 1996 was 3,618,212.
Transitional Small Business Disclosure Format (Check one): Yes _____ No __X__
SPECTRASCIENCE, INC.
FORM 10-QSB
JUNE 30, 1996
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) 3
Balance Sheets -- June 30, 1996 and December 31, 1995 3
Statements of Operations -- Three months Ended June 30, 1996 and 1995
Six months Ended June 30, 1996 and 1995 4
Statements of Cash Flows -- Six months Ended June 30, 1996, and 1995 5
Notes to Financial Statements -- June 30, 1996 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 6
PART II OTHER INFORMATION 9
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 10
SIGNATURES 11
EXHIBIT 99 Cautionary Statement Identifying Important Factors 12
that Could Cause the Company's Actual Results to
Differ from Those Projected in Forward-Looking Statements.
PART I -- FINANCIAL INFORMATION
SPECTRASCIENCE, INC.
FORM 10-QSB
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,507,170 $ 4,123,326
Accounts receivable 320 100,641
Inventory 205,311 181,871
Other current assets 46,085 80,197
------------ ------------
Total current assets 3,758,886 4,486,035
Net fixed assets 242,953 158,230
------------ ------------
TOTAL ASSETS $ 4,001,839 $ 4,644,265
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 107,831 $ 150,278
Accrued compensation and taxes 28,155 74,328
Accrued expenses 68,130 30,058
------------ ------------
Total current liabilities 204,116 254,664
Commitments
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00 per share
Authorized shares--20,000,000
Convertible preferred stock, Series A, par value
$1.00 per share:
Authorized shares--5,000,000
Issued and outstanding shares--674,998 674,998 674,998
Convertible preferred stock, Series B, par value
$1.00 per share:
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--
2,976,548 on June 30, 1996 and
2,933,348 on December 31, 1995 744,137 733,337
Additional paid-in capital 43,258,109 43,136,284
Accumulated deficit (41,672,021) (40,947,518)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 3,797,723 4,389,601
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 4,001,839 $ 4,644,265
============ ============
</TABLE>
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.
SPECTRASCIENCE, INC.
FORM 10-QSB
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ -- $ -- $ -- $ 166,088
Cost of products sold -- -- -- 108,144
----------- ----------- ----------- -----------
Gross Profit -- -- -- 57,944
Operating expenses
Research and development 233,096 197,660 468,991 319,611
Selling, general and
administrative 152,792 174,510 351,929 297,327
----------- ----------- ----------- -----------
Total operating expenses 385,888 372,170 820,920 616,938
Interest and other
income (expense) 45,749 3,824 96,417 (5,666)
----------- ----------- ----------- -----------
Net loss $ (340,139) $ (368,346) $ (724,503) $ (564,660)
=========== =========== =========== ===========
Net loss per share $ (0.11) $ (0.13) $ (0.24) $ (0.20)
Weighted average common
shares outstanding 2,976,548 2,859,502 2,960,428 2,825,282
</TABLE>
See notes to financial statements.
SPECTRASCIENCE, INC.
FORM 10-QSB
STATEMENTS OF CASH FLOW (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (724,503) $ (564,660)
Adjustments to reconcile net cash
used in operating activities:
Depreciation 35,120 26,301
Recognition of deferred income -- (26,000)
Non-cash interest expense -- 3,260
Disposal of other assets -- 37,444
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 100,319 (158,715)
(Increase) decrease in inventories (23,438) 21,761
Decrease in other current assets 34,112 1,009
(Decrease) in current liabilities (50,548) (133,916)
----------- -----------
Net cash used in operating activities (628,938) (793,516)
INVESTING ACTIVITIES
Purchase of fixed assets (119,843) (1,171)
----------- -----------
Net cash used in investing activities (119,843) (1,171)
FINANCING ACTIVITIES
Proceeds from issuance of notes payable -- 225,000
Proceeds from issuance of common stock 132,625 225,000
Proceeds from issuance of preferred stock -- 900,000
----------- -----------
Net cash provided by financing activities 132,625 1,350,000
----------- -----------
Net (decrease) increase in cash and
cash equivalents (616,156) 555,313
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 4,123,326 58,298
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 3,507,170 $ 613,611
=========== ===========
</TABLE>
See notes to financial statements.
SPECTRASCIENCE, INC.
FORM 10-QSB
JUNE 30, 1996
NOTES TO FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated 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 six-month periods ended June 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 this Form 10-QSB for certain important
cautionary factors, risks and uncertainties related to forward-looking
statements.
(a) BUSINESS
SpectraSCIENCE, Inc. (the "Company" or "SpectraSCIENCE"), 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 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 executive offices of the Company are located at 5909 Baker
Road, Suite 580, Minnetonka, Minnesota 55345. The Company's telephone number is
(612) 931-9000, and its fax number is (612) 933-9090.
The Company's common stock, par value $.25 (the "Common Stock"), is
currently traded on the NASDAQ Small-Cap Market under the symbol SPSI.
The Company currently has two products that are in the testing and
development stages. The first product is the Spectroscopic GuidewireTM System
(which consists of the Spectroscopic DiagnosticTM System console ("Console"),
proprietary system software and a disposable optical core Spectroscopic
GuidewireTM), targeted for the detection of intracoronary thrombus and
differentiation of atherosclerotic plaque. The second product is the Optical
BiopsyTM System (which consists of the Console, proprietary system software and
a disposable Optical Biopsy ForcepsTM), targeted for the detection and
differentiation of cancerous, pre-cancerous and healthy tissues.
The Company anticipates to complete its clinical trials in the third
quarter of 1996, followed by regulatory submissions to the United States Food
and Drug Administration. Therefore, expenses related to these activities are
anticipated to increase.
(b) RESULTS OF OPERATIONS
The Company recorded no revenue for the three and six months ended June
30, 1996 compared to $0 and $166,088 for the same periods in 1995. Revenue for
the six months ended June 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 six months ended June 30, 1996
were therefore $0, compared to $0 and $108,144 for the same periods in 1995. As
a result, gross profit for the three and six months ended June 30, 1996 were $0
compared to $0 and $57,944 for the same periods in 1995.
Research and development expenses for the three and six months ended
June 30, 1996 were $233,096 and $468,991 compared to $197,660 and $319,611 for
the same periods in 1995. The increase of 17.9% for the three months ended June
30, 1996 were mainly due to the increase in consulting expenses, hiring of an
Optics Engineer, legal expenses associated with the filing of patent
applications and expenses related to clinical trials. Consulting expenses
increased due to the Company's efforts to maintain a lower headcount and in
obtaining specific expertise in regulatory strategies, product design and
endoscopy. The increase of 46.7% for the six months ended June 30, 1996 was due
to the expenses mentioned above, higher design engineering expenses and
additional expenses incurred in clinical research agreements.
Selling, general and administrative expenses for the three and six
months ended June 30, 1996 were $152,792 and $351,929 compared to $174,510 and
$297,327 for the same periods in 1995. The decrease of 12.4% for the three
months ended June 30, 1996 was primarily due to the expenses associated with the
annual meeting of shareholders which were incurred in the first quarter of 1996,
but were incurred in the second quarter of 1995. The increase of 18.4% for the
six months ended June 30, 1996 was primarily due to the addition of the Chief
Financial Officer, 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 (expense) for the three and six months ended
June 30, 1996 was $45,749 and $96,417 compared to $3,824 and $(5,666) for the
same periods in 1995. The increase was primarily due to higher balance in cash
and cash equivalents.
As a result of the above, the net losses for the three and six months
ended June 30, 1996 were $340,139 and $724,503, compared to net losses of
$368,346 and $564,660 for the same periods in 1995. The decrease of 7.7% for the
three month periods was due primarily to higher interest income. The net loss
for the six months ended June 30, 1996 represented a 28.3% increase from the
same period in 1995, due to the lack of revenue and higher expenses primarily
associated with research and development, mitigated by higher interest income.
Consequently, the net loss per share for the three and six months ended June 30,
1996 were $.11 and $.24 compared to $.13 and $.20 for the same periods in 1995.
(c) LIQUIDITY AND SOURCES OF CAPITAL
Cash and cash equivalents on June 30, 1996 was $3,507,170 compared to
$4,123,326 on December 31, 1995. The decrease in the cash position from December
31, 1995 to June 30, 1996 was the result of the net loss in the six month period
that ended June 30, 1996.
The working capital of the Company on June 30, 1996 was $3,554,770
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 six months ended June 30,
1996 was $628,938 compared to $793,516 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 six months ended June 30,
1996 was $119,843 compared to $1,171 for the same period in 1995. This increase
was due to the installation of two Consoles for clinical testing purposes.
Net cash provided by financing activities for the six months ended June
30, 1996 was $132,625 compared to $1,350,000 for the same period in 1995. The
amount provided for the six months ended June 30, 1996 was the result of stock
option exercises in the first quarter of 1996. The amount provided for the six
months ended June 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.
SPECTRASCIENCE, INC.
FORM 10-QSB
JUNE 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) NASDAQ LISTING
The Company received approval to commence trading its Common Stock on
the NASDAQ Small-Cap Market on April 15, 1996 under the symbol SPSI. The Common
Stock of the Company was previously traded on the OTC Bulletin Board under the
same symbol.
(b) EFFECTIVENESS OF FORM S-3 REGISTRATION STATEMENT
The Form S-3 Registration Statement (File No. 333-01149) filed by the
Company with the Securities and Exchange Commission was declared effective
pursuant to Section 8(a) of the Securities Act of 1933, as amended, on June 7,
1996. The purpose of the Form S-3 Registration Statement was to register
2,264,006 shares of the Common Stock of the Company for the conversion of
1,467,498 shares of outstanding Series A Preferred Stock and Series B Preferred
Stock into Common Stock on a one-to-one basis, and the exercise of outstanding
warrants to purchase 796,508 shares of Common Stock, at various prices.
The Company anticipates that 674,998 shares of Series A Preferred
Stock, convertible on or after June 29, 1996, will be converted to Common Stock
in the third quarter of 1996, and 792,500 shares of Series B Preferred Stock,
convertible on or after December 28, 1996, will be converted to Common Stock in
the first quarter of 1997. These conversions will not provide additional cash to
the Company.
The outstanding warrants, exercisable at prices of $3.00, $5.00 and
$9.50, are exercisable at any time before expiration. The Company anticipates
that some of these warrants will be exercised in 1996. If all the outstanding
warrants were exercised, the Company could potentially receive an additional
$4,900,213. However, there is no assurance that any of the warrants will be
exercised.
(c) PATENT APPLICATIONS
Two patent applications related to the Optical Biopsy ForcepsTM were
submitted to the United States Patent and Trademark Office in the second quarter
of 1996. While the Company believes that these patents, if issued, will
strengthen the Company's value of intellectual property, there is no assurance
that the patents will be issued, or if issued, that all the claims would be
valid.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS ON THIS FORM 10-QSB
Exhibit 99: Cautionary Statement Identifying Important Factors
that Could Cause the Company's Actual Results to Differ from
Those Projected in Forward-Looking Statements.
(b) 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
JUNE 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)
AUGUST 12, 1996 /s/ Brian T. McMahon
Date BRIAN T. MCMAHON
President and Chief Executive Officer
(Principal Executive Officer)
AUGUST 12, 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)
SPECTRASCIENCE, INC.
FORM 10-QSB
JUNE 30, 1996
EXHIBIT 99: Cautionary Statement Identifying Important Factors that
Could Cause the Company's Actual Results to Differ from Those
Projected in Forward-Looking Statements.
SPECTRASCIENCE, INC. (THE "COMPANY"), DESIRES TO TAKE ADVANTAGE OF THE
NEW "SAFE HARBOR" PROVISIONS CONTAINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 (THE "ACT"). CONTAINED IN THIS FORM 10-QSB ARE STATEMENTS
WHICH ARE INTENDED AS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
ACT. WHEN USED IN THIS FORM 10-QSB AND IN FUTURE FILINGS BY THE COMPANY WITH THE
SECURITIES AND EXCHANGE COMMISSION, IN THE COMPANY'S PRESS RELEASES AND IN ORAL
STATEMENTS, WORDS OR PHRASES SUCH AS "MAY," "EXPECTS," "WILL CONTINUE," "IS
ANTICIPATED," "MANAGEMENT BELIEVES," "ESTIMATE," "PROJECTS," "HOPE" OR
EXPRESSIONS OF A SIMILAR NATURE ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE ACT. THESE STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OR FROM THOSE RESULTS PRESENTLY ANTICIPATED
OR PROJECTED. THE COMPANY WISHES TO CAUTION READERS NOT TO PLACE UNDUE RELIANCE
ON FORWARD-LOOKING STATEMENTS. READERS SHOULD BE ADVISED THAT THE FACTORS LISTED
BELOW HAVE AFFECTED THE COMPANY'S PERFORMANCE IN THE PAST AND COULD AFFECT
FUTURE PERFORMANCE. THESE FACTORS ARE IN ADDITION TO ANY OTHER CAUTIONARY
STATEMENTS, WRITTEN OR ORAL, WHICH MAY BE MADE OR REFERRED TO IN CONNECTION WITH
ANY FORWARD-LOOKING STATEMENTS OR CONTAINED IN ANY SUBSEQUENT FILINGS BY THE
COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION.
NEED FOR ADDITIONAL CAPITAL; UNCERTAINTY OF ADDITIONAL FINANCING
The development of the Company's products will require the commitment of
substantial funds to conduct research and development, to establish commercial
scale manufacturing capabilities, and to market its products. The Company's
future capital requirements will depend on many factors, including the progress
of the Company's research and development, the scope and results of clinical
trials, the cost and time of obtaining regulatory approvals, the rate of
technological advances, determinations as to the commercial potential of the
Company's products, the status of competitive products and the establishment of
manufacturing capacity. The Company anticipates that its current funds will be
adequate to satisfy its capital requirements until approximately December 1997.
The Company anticipates that it will be required to raise substantial additional
funds, including funds raised through strategic partnerships and additional
public or private financings. No assurance can be given that additional
financing will be available or that, if available, it will be available on terms
favorable to the Company or its shareholders. If the Company is unable to obtain
additional financing when needed, the Company may be required to curtail its
operations significantly or to obtain funds through strategic partners that may
require the Company to relinquish significant rights to its technology or
potential markets.
VOLATILITY OF STOCK PRICE
The market price for securities of high technology medical products
companies have historically been highly volatile, and the market has from time
to time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. Factors such as
fluctuations in the Company's operating results, announcements of technological
innovations or new diagnostic or therapeutic products by the Company or its
competitors, government regulations, developments in patent or other proprietary
rights, public concern as to the safety of products developed by the Company or
others and general market conditions may have a significant adverse effect on
the market price of the Company's Common Stock.
UNCERTAINTY OF MARKET ACCEPTANCE; NEED FOR REGULATORY APPROVAL
Sales to date have been very limited, and it is not anticipated that
revenues from sales of the Company's products will be significant until at least
1997. In addition, there can be no assurance that the Company's products will be
acceptable to the market. Moreover, there are many reasons that potential
products that appear promising do not result in successful commercialization.
Newly developed products may not receive regulatory approval or be successfully
introduced and marketed at prices that would permit the Company to operate
profitably. Failure of any of the Company's products to achieve market
acceptance could have a material adverse effect on the Company's business,
financial condition or results of operations.
LACK OF SUFFICIENT DATA TO ESTABLISH SAFETY AND EFFICACY OF PRODUCTS
In June 1995, the Company entered into a two-year collaborative research
agreement for the spectroscopic detection of cancer using minimally invasive
endoscopic and laparoscopic techniques. Applications currently targeted include
the real-time spectroscopic identification and differentiation of pre-cancerous
lesions and cancerous tissues in various areas of the body which can be accessed
less invasively, such as the lung, bladder, prostate, cervix, upper and lower
gastrointestinal tract and colon. There can be no assurance that clinical
results will be encouraging. Other risks attendant with the clinical trials
include the unpredictability of the time frame for completion due to patient
availability, hospital procedures and policies which could change, and changes
in the principal investigators leading the clinical trials.
The Company has also been conducting clinical feasibility studies
designed to lead to the development of a commercial product for cardiovascular
applications. These studies are carried out under Investigational Device
Exemptions ("IDE") approved by the Food and Drug Administration ("FDA") and also
by the hospital's Institutional Review Board ("IRB"). There can be no assurance
such studies or development will prove successful.
DEPENDENCE ON PATENTS, PROPRIETARY RIGHTS AND LICENSES
The Company's success depends and will continue to depend in part on its
ability to maintain patent protection for products and processes, to preserve
its trade secrets and to operate without infringing upon the proprietary rights
of third parties. Although the Company has been awarded a number of patents that
it hopes to exploit commercially, there can be no assurance that the patents
will afford protection against competitors with similar technology. The validity
and breadth of claims covered in medical technology patents involve complex
legal and factual questions and, therefore, may be highly uncertain. The Company
also relies upon unpatented proprietary technology. No assurance can be given
that the Company can meaningfully protect its rights in such unpatented
proprietary technology or that others will not duplicate or independently
develop substantially equivalent technology.
In order to manufacture and market certain products, the Company may be
required to obtain licenses to patents or other proprietary rights of third
parties. There can be no assurance that the Company will be able to license such
technology at a reasonable cost, if at all. If the Company does not obtain such
licenses, it could encounter delays in introducing such products while it
attempts to design around such patents. There can be no assurance that the
Company would be able to design around such patents or, even if successful, the
Company could find that the development, manufacture or sale of such products
could be adversely affected.
RISK OF PATENT LITIGATION
The Company could incur substantial costs in defending itself in suits
brought against it on such patents or in suits in which the Company's patents
may be asserted by it against another party. There has been substantial
litigation regarding patent and other intellectual property rights in the
medical device industry. Litigation, which could result in substantial cost to
and diversion of effort by the Company, may be necessary to enforce patents
issued to the Company, to protect trade secrets or know-how owned by the
Company, to defend the Company against claimed infringement of the rights of
others or to determine the ownership, scope or validity of the proprietary
rights of the Company and others. An adverse determination in any such
litigation could subject the Company to significant liabilities to third
parties, could require the Company to seek licenses from third parties and could
prevent the Company from manufacturing, selling or using its products, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON LICENSE AGREEMENTS
The Company has acquired significant proprietary rights under certain
license agreements that permit the licensor to terminate these agreements in the
event of certain material breaches by the Company. There can be no assurance
that defaults will not occur in the future. If a default occurred and any of
these agreements were terminated in the future, the Company could lose the right
to continue to develop and market one or more products.
DEPENDENCE ON KEY PERSONNEL AND CONSULTANTS
The Company's success is highly dependent on the retention of principal
members of its management and scientific staff, key consulting arrangements and
the recruitment of additional qualified personnel. There is intense competition
from other companies, research and academic institutions and other organizations
for qualified personnel in the areas of the Company's activities. There can be
no assurance that the Company will be successful in hiring or retaining
qualified personnel. The loss of key personnel or the inability to hire or
retain qualified personnel could have an adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON CONSULTANTS AND CONTRACT MANUFACTURERS
The Company has entered into consulting agreements with a number of
individuals and business organizations who are currently providing management,
software development, and regulatory compliance and submissions. Risks attendant
to the use of consultants include their competence and availability on short
notice. The Company also relies on contract manufacturers. The contract
manufacturers are subject to audit by the FDA, and there can be no assurance
that they will be in compliance with applicable FDA regulations. Additional
risks associated with the use of contract manufacturers include manufacturing
priorities and the resultant ability to obtain products on a timely basis, and
less control over the manufacturing process, costs and inventory control and
maintenance of proprietary information.
OPERATING LOSS AND ACCUMULATED DEFICIT
The Company has incurred net losses since its inception. The Company has
accumulated deficits of approximately $40.9 million at December 31, 1995 and
$41.7 million at June 30, 1996. Such losses have resulted principally from
expenses incurred in the Company's research and development program, the
acquisition of new technology, and, to a lesser extent, from general and
administrative expenses. The Company expects to incur substantial losses for the
fiscal year 1996 due primarily to additional research and development expenses
and expects to incur substantial net operating losses at least through 1997.
There can be no assurance that the Company will successfully market its products
or ever achieve or sustain profitability.
LIMITED MANUFACTURING AND MARKETING EXPERIENCE FOR PRODUCTS; UNCERTAINTY OF
MARKET ACCEPTANCE
For the Company to be financially successful, it must manufacture its
products in accordance with regulatory requirements, in commercial quantities,
at appropriate quality levels and at acceptable costs. The Company intends to
market and sell some of its products directly, while relying on sales and
marketing expertise of corporate partners for other products. However, the
Company has limited experience in direct marketing of its products, and there
can be no assurance that such direct marketing will be successful.
PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE
The Company faces an inherent business risk of exposure to product
liability claims. Clinical trials or marketing of any of the Company's products
may expose the Company to liability claims resulting from the use of such
products. These claims might be made directly by consumers, health care
providers or by others selling the products. The Company currently maintains
product liability insurance coverage at levels considered adequate by
management. There can be no assurance that the Company will be able to maintain
such insurance or, if maintained, that sufficient coverage can be acquired at a
reasonable cost. An inability to maintain insurance at acceptable cost or at all
could prevent or inhibit the clinical testing or commercialization of products
developed by the Company. In addition, there can be no assurance, regardless of
the availability of product liability insurance, that the Company will be
adequately protected from claims that may be brought against it. A product
liability claim or recall could have a material adverse effect on the Company's
business, financial condition and results of operations.
ADVERSE EFFECT OF FUTURE SALES OF COMMON STOCK ON MARKET PRICE; DILUTION
Future sales of common shares by existing shareholders and holders of
options and warrants could adversely affect the prevailing market price of the
Company's Common Stock. Investors purchasing the Company's Common Stock could
therefore, incur immediate substantial dilution.
UNCERTAINTY OF FINANCIAL PROJECTIONS AND MANAGEMENT PLANS
There are substantial risks and uncertainties associated with the
Company's financial projections, management plans and time schedules. Many of
the objectives and projections of the Company's business may not be achievable.
There could be (i) errors of omission or of estimation in the Company's plans,
(ii) new events or circumstances imposed on the business that require additional
time and/or capital, or (iii) product failures with respect to any number of
tests, government requirements or market requirements resulting in delays,
redesign or even abandonment of products. If any of these events, as well as
others currently unforeseen, should occur, it could have a material adverse
effect on management's plans for development of the business.
UNCERTAINTY OF HEALTH CARE REIMBURSEMENT AND PROPOSED HEALTH CARE LEGISLATION
The levels of revenue and profitability of medical device companies may
be affected by the continuing efforts of government and third party payors to
reduce the costs of health care through various means. Government and other
third party reimbursement sources are increasingly attempting to contain
healthcare costs by limiting both coverage and the level of reimbursement,
especially for new diagnostic and therapeutic products. If adequate coverage and
reimbursement levels are not provided by government and third party
reimbursement sources for uses of the products to be commercialized by the
Company, market acceptance of these products could be adversely affected.
Furthermore, significant changes in the healthcare system of the United States
and other countries could have a substantial impact over time on the manner in
which the Company conducts its business and could have a material adverse effect
on the Company's business, financial condition and results of operations.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,507,170
<SECURITIES> 0
<RECEIVABLES> 320
<ALLOWANCES> 0
<INVENTORY> 251,396
<CURRENT-ASSETS> 3,758,886
<PP&E> 799,980
<DEPRECIATION> 557,027
<TOTAL-ASSETS> 4,001,839
<CURRENT-LIABILITIES> 204,116
<BONDS> 0
0
1,467,498
<COMMON> 744,137
<OTHER-SE> 1,586,088
<TOTAL-LIABILITY-AND-EQUITY> 4,001,839
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 385,888
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (45,749)
<INCOME-PRETAX> (340,139)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (340,139)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> 0
</TABLE>
