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, 1997
[ ] 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
(Address of principal executive offices)
(612) 509-9999
(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 per share,
outstanding on August 11, 1997 was 4,480,379.
Transitional Small Business Disclosure Format (Check one): Yes _____ No __X__
<PAGE>
SpectraSCIENCE, Inc.
FORM 10-QSB
June 30, 1997
Index
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I -- FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Balance Sheets -- June 30, 1997 and December 31, 1996 3
Statements of Operations -- Three Months Ended June 30, 1997 and 1996 4
Six Months Ended June 30, 1997 and 1996
Statements of Cash Flows -- Six Months Ended June 30, 1997 and 1996 5
Notes to Financial Statements -- June 30, 1997 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
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 10
ITEM 6. Exhibits and Reports on Form 8-K 10
Signatures 11
Exhibit 27: Financial Data Schedule pursuant to Article 5 of Regulation S-X 12
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
SpectraSCIENCE, Inc.
FORM 10-QSB
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,327,247 $ 3,047,182
Inventories 182,919 192,151
Other current assets 71,630 103,736
------------ ------------
Total current assets 2,581,796 3,343,069
Net property and equipment 179,315 207,520
------------ ------------
TOTAL ASSETS $ 2,761,111 $ 3,550,589
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 72,791 $ 107,866
Accrued compensation and taxes 100,328 97,735
Accrued expenses 258,882 187,016
------------ ------------
Total current liabilities 432,001 392,617
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 in 1996 66,667
Convertible preferred stock, Series B:
Authorized shares--1,000,000
Issued and outstanding shares--792,500 in 1996 792,500
Common stock, $.25 par value:
Authorized shares--10,000,000
Issued and outstanding shares--
4,480,379 on June 30, 1997 and
3,621,212 on December 31, 1996 1,120,095 905,303
Additional paid-in capital 44,531,314 43,886,939
Accumulated deficit (43,322,299) (42,493,437)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 2,329,110 3,157,972
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 2,761,111 $ 3,550,589
============ ============
</TABLE>
Note: The balance sheet on December 31, 1996 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.
3
<PAGE>
SpectraSCIENCE, Inc.
FORM 10-QSB
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ -- $ -- $ -- $ --
Cost of products sold -- -- -- --
----------- ----------- ----------- -----------
Gross profit -- -- -- --
Operating expenses
Research and development 226,017 233,096 490,075 468,991
Selling, general and
administrative 188,309 152,792 412,146 351,929
----------- ----------- ----------- -----------
Total operating expenses 414,326 385,888 902,221 820,920
Interest and other
income (expense) 34,594 45,749 73,359 96,417
----------- ----------- ----------- -----------
Net loss $ (379,732) $ (340,139) $ (828,862) $ (724,503)
=========== =========== =========== ===========
Net loss per share $ (0.08) $ (0.11) $ (0.19) $ (0.24)
Weighted average common
shares outstanding 4,480,379 2,976,548 4,444,873 2,960,428
</TABLE>
See notes to financial statements.
4
<PAGE>
SpectraSCIENCE, Inc.
FORM 10-QSB
STATEMENTS OF CASH FLOW (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (828,862) $ (724,503)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation 34,900 35,120
Changes in operating assets
and liabilities:
Decrease in accounts receivable -- 100,319
Decrease (increase) in inventories 9,232 (23,438)
Decrease in other current assets 32,106 34,112
Increase (decrease) in current liabilities 39,384 (50,548)
----------- -----------
Net cash used in operating activities (713,240) (628,938)
INVESTING ACTIVITIES
Purchase of property and equipment (6,695) (119,843)
----------- -----------
Net cash used in investing activities (6,695) (119,843)
FINANCING ACTIVITIES
Proceeds from issuance of common stock -- 132,625
----------- -----------
Net cash provided by financing activities -- 132,625
----------- -----------
Net decrease in cash and cash equivalents (719,935) (616,156)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 3,047,182 4,123,326
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 2,327,247 $ 3,507,170
=========== ===========
Supplemental schedule of non-cash transactions
Series A and B preferred stock converted into
common stock $ 859,167
</TABLE>
See notes to financial statements.
5
<PAGE>
SpectraSCIENCE, Inc.
FORM 10-QSB
June 30, 1997
- --------------------------------------------------------------------------------
This Quarterly Report on Form 10-QSB contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
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. The Company wishes to caution readers not to place undue
reliance on forward-looking statements. Please 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.
- --------------------------------------------------------------------------------
Notes to Financial Statements
NOTE A Basis of Presentation
The accompanying unaudited 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, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997. 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, 1996.
NOTE B Net Loss Per Share
Net loss per share is computed using the weighted average number of common
shares outstanding during the period. Common equivalent shares from stock
options and warrants are excluded from the computation as their effect is
anti-dilutive. In February 1997, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 128, "Earnings Per Share." This Statement replaces the
presentation of primary earnings per share (EPS) with basic EPS and also
requires dual presentation of basic and diluted EPS for entities with complex
capital structures. This Statement is effective for the fiscal year ending
December 31, 1997. For the three- and six-month periods ended June 30, 1997,
there is no difference between basic loss per share under Statement No. 128 and
net loss per share as reported by the Company.
6
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
(a) Business
SpectraSCIENCE, Inc. (the "Company" or "SpectraSCIENCE") develops
innovative, minimally-invasive medical delivery systems to facilitate the
diagnosis and treatment of a broad range of human diseases by utilizing advanced
spectroscopy, fiber optics, computer hardware and software.
The Company currently has two products that are in the testing and
development stages: the Optical Biopsy(TM) System, which is targeted for the
detection and differentiation of cancerous, pre-cancerous and healthy tissues;
and the Spectroscopic Guidewire(TM) 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. In 1992, the Company was re-organized and adopted a new name,
SpectraSCIENCE, Inc. The Company's common stock, par value $.25 per share (the
"Common Stock"), is currently traded on the NASDAQ Small-Cap Market under the
symbol SPSI.
(b) Results of Operations
The Company recorded no revenue for the three and six months ended June 30,
1997 and June 30, 1996.
Research and development expenses for the three and six months ended June
30, 1997 were $226,017 and $490,075 compared to $233,096 and $468,991 for the
same periods in 1996. The slight decrease of 3.0% for the three months ended
June 30, 1997 was primarily due to the fact that the first clinical research
agreement with the Wellman Laboratories of Photomedicine, Massachusetts General
Hospital, ended in the first quarter of 1997. As such, the expense related to
this agreement during the quarter ended June 30, 1996 was not incurred in the
quarter ended June 30, 1997. This decrease was offset by an increase in salary
expenses related to the hiring of a Vice President of Development in November
1996, a Director of Regulatory Affairs in September 1996 and a product
development engineer in March 1997. The slight increase of 4.5% for the six
months ended June 30, 1997 was primarily due to personnel expenses mentioned
above.
Selling, general and administrative expenses for the three and six months
ended June 30, 1997 were $188,309 and $412,146 compared to $152,792 and $351,929
for the same periods in 1996. The 23.2% increase for the three months ended June
30, 1997 was primarily due to increases in expenses for general corporate
insurance, rent, legal, benefits and wages. In addition, expenses related to the
1997 annual meeting of shareholders were incurred in the second quarter of 1997,
but were incurred in the first quarter of 1996. The increase of 17.1% for the
six months ended June 30, 1996 was primarily due to increases in expenses
mentioned above.
Interest and other income for the three and six months ended June 30, 1997
were $34,594 and $73,359 compared to $45,749 and $96,417 for the same periods in
1996. The decrease was primarily due to lower balances in cash and cash
equivalents.
As a result of the above, the net loss for the three and six months ended
June 30, 1997 was $379,732 and $828,862 compared to a net loss of $340,139 and
$724,503 for the same periods in 1996. In spite of the increase in losses, the
loss per share for the three and six months
7
<PAGE>
ended June 30, 1997 were $0.08 and $0.19 compared to $0.11 and $0.24 for the
same periods in 1996. The reduction in the loss per share was due to a greater
number of shares of common stock outstanding which resulted from the conversion
of the remaining 859,167 shares of series A and series B preferred stock into an
equivalent number of shares of common stock in the first quarter of 1997.
(c) Liquidity and Sources of Capital
Cash and cash equivalents on June 30, 1997 were $2,327,247 compared to
$3,047,182 on December 31, 1996. The decrease in the cash position from December
31, 1996 to June 30, 1997 was the result of the net loss during the six-month
period that ended June 30, 1997.
The working capital of the Company on June 30, 1997 was $2,149,795 compared
to $2,950,452 on December 31, 1996. This decrease was primarily due to a
reduction of the cash position.
Net cash used in operating activities for the six months ended June 30,
1997 was $713,240 compared to $628,938 for the same period in 1996. This
increase was primarily due to the higher net loss in 1997 compared to 1996.
Net cash used in investing activities for the six months ended June 30,
1997 was $6,695 compared to $119,843 for the same period in 1996. This decrease
was due to lower purchases of property and equipment in 1997.
Net cash provided by financing activities for the six months ended June 30,
1997 was $0 compared to $132,625 for the same period in 1996. The conversion of
all the remaining shares of series A and series B preferred stock to common
stock in the first quarter of 1997 were non-cash conversions.
Management believes that the amount of cash and cash equivalents is
adequate to fund operations at least through December 1997.
8
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. Legal Proceedings
There are no material on-going or pending legal proceedings which involve
the Company.
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
Reference is made hereby to the Company's definitive proxy statement (Form
DEF 14A) for the Annual Meeting of Shareholders held on May 21, 1997, as filed
with the Securities and Exchange Commission on April 8, 1997, File No. 0-13092.
(a) The Annual Meeting of Shareholders of SpectraSCIENCE, Inc. (the "Meeting")
was held on May 21, 1997
Shareholders of record at the close of business on March 26, 1997, (the
"Record Date") were entitled to receive notice of and to vote at the
Meeting and any adjournment thereof. On the Record Date, 4,480,379 shares
of the Company's common stock, par value $.25 per share (the "Shares"),
were entitled to vote at the Meeting, of which a total of 3,834,820 Shares,
or 85.6% of the total Shares outstanding, were represented at the Meeting.
(b) The following individuals were re-elected to serve as directors of the
Company:
Brian T. McMahon
Henry M. Holterman
Nathaniel S. Thayer
Item One was the proposal to elect three (3) persons to serve as directors
until the next meeting of shareholders or until their respective successors
shall be elected and qualified. All of the nominees for directors were elected
by the shareholders. The final votes for each of the nominees were as follows:
<TABLE>
<CAPTION>
Name No. of Votes As % of Total No. of Votes As % of Total
FOR Shares Outstanding WITHHELD Shares Outstanding
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Brian T. McMahon 3,786,401 84.5% 48,419 1.1%
Henry M. Holterman 3,785,543 84.5% 49,277 1.1%
Nathaniel S. Thayer 3,785,673 84.5% 49,147 1.1%
</TABLE>
There were no broker non-votes for this item.
9
<PAGE>
Item Two was the proposal to ratify the appointment of Ernst & Young LLP as
the Company's auditors for 1997. This proposal was approved by the shareholders.
The final vote for this item was as follows:
<TABLE>
<CAPTION>
No. of Votes FOR No. of Votes AGAINST No. of Votes ABSTAIN
(As % of Total Shares Outstanding) (As % of Total Shares Outstanding) (As % of Total Shares Outstanding)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
3,800,203 (84.8%) 7,688 (0.2%) 26,929 (0.6%)
</TABLE>
There were no broker non-votes for this item.
ITEM 5. Other Information
(a) Clinical Trials
The Company received approval from the Food and Drug Administration (the
"FDA") to commence human clinical trials on the Optical Biopsy(TM) System at
three clinical research centers on 300 patients. Clinical trials have commenced
at the Mayo Clinic, Rochester, Minnesota and the Hennepin County Medical Center,
Minneapolis, Minnesota. Clinical trials at the third center, Massachusetts
General Hospital, Boston, Massachusetts, are expected to commence in August
1997.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27: Financial Data Schedule pursuant to Article 5 of Regulation
S-X.
(b) Form 8-K: No reports on Form 8-K were filed by the Company during the
quarter covered by this report.
10
<PAGE>
SpectraSCIENCE, Inc.
FORM 10-QSB
June 30, 1997
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, 1997 /s/ Brian T. McMahon
- ---------------------- --------------------
Date BRIAN T. McMAHON
President and Chief Executive Officer
(Principal Executive Officer)
August 12, 1997 /s/ Ching-Meng Chew
- ---------------------- --------------------
Date CHING-MENG CHEW
Vice President Finance and Administration
Chief Financial Officer
Treasurer and Corporate Secretary
(Principal Financial and Accounting Officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS SUBMITTED IN THIS QUATERLY REPORT ON FORM 10-QSB FOR
THE QUARTER ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,327,247
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 182,919
<CURRENT-ASSETS> 2,581,796
<PP&E> 804,639
<DEPRECIATION> 625,324
<TOTAL-ASSETS> 2,761,111
<CURRENT-LIABILITIES> 432,001
<BONDS> 0
0
0
<COMMON> 1,120,095
<OTHER-SE> 1,209,015
<TOTAL-LIABILITY-AND-EQUITY> 2,761,111
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 414,326
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (34,594)
<INCOME-PRETAX> (379,732)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (379,732)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> 0
</TABLE>
