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, 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 November 12, 1997 was 4,496,559.
Transitional Small Business Disclosure Format (Check one): Yes ___ No _X_
<PAGE>
SpectraSCIENCE, Inc.
FORM 10-QSB
September 30, 1997
<TABLE>
<CAPTION>
Index
Page No.
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<S> <C>
PART I -- FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited) 3
Balance Sheets -- September 30, 1997 and December 31, 1996 3
Statements of Operations -- Three Months Ended September 30, 1997 and 1996
Nine Months Ended September 30, 1997 and 1996 4
Statements of Cash Flows -- Nine Months Ended September 30, 1997 and 1996 5
Notes to Financial Statements -- September 30, 1997 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 7
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
Exhibit 27: Financial Data Schedule pursuant to Article 5 of Regulation S-X 11
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
SpectraSCIENCE, Inc.
FORM 10-QSB
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,991,157 $ 3,047,182
Inventories 172,917 192,151
Other current assets 58,706 103,736
------------ ------------
Total current assets 2,222,780 3,343,069
Net property and equipment 168,981 207,520
------------ ------------
TOTAL ASSETS $ 2,391,761 $ 3,550,589
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 109,253 $ 107,866
Accrued compensation and taxes 44,496 97,735
Accrued expenses 221,010 187,016
------------ ------------
Total current liabilities 374,759 392,617
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--
4,485,379 on September 30, 1997 and
3,621,212 on December 31, 1996 1,121,345 905,303
Additional paid-in capital 44,545,064 43,886,939
Accumulated deficit (43,649,407) (42,493,437)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 2,017,002 3,157,972
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 2,391,761 $ 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 Nine Months Ended
September 30 September 30
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ -- $ -- $ -- $ --
----------- ----------- ----------- -----------
Cost of products sold -- -- -- --
----------- ----------- ----------- -----------
Gross profit -- -- -- --
Operating expenses
Research and development 281,192 249,769 771,267 718,760
Selling, general and
administrative 77,353 167,428 489,498 519,357
----------- ----------- ----------- -----------
Total operating expenses 358,545 417,197 1,260,765 1,238,117
Interest and other
income (expense) 31,437 43,601 104,796 140,018
----------- ----------- ----------- -----------
Net loss $ (327,108) $ (373,596) $(1,155,969) $(1,098,099)
=========== =========== =========== ===========
Net loss per share $ (0.07) $ (0.10) $ (0.26) $ (0.35)
Weighted average common
shares outstanding 4,480,705 3,560,006 4,456,948 3,161,746
</TABLE>
See notes to financial statements.
4
<PAGE>
SpectraSCIENCE, Inc.
FORM 10-QSB
STATEMENTS OF CASH FLOW (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,155,969) $(1,098,099)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation 50,230 53,818
Changes in operating assets
and liabilities:
Decrease in accounts receivable -- 100,639
Decrease (increase) in inventories 19,234 (17,106)
Decrease (increase) in other current assets 45,030 (27,750)
(Decrease) in current liabilities (17,858) (39,814)
----------- -----------
Net cash used in operating activities (1,059,333) (1,028,312)
INVESTING ACTIVITIES
Purchase of property and equipment (11,692) (120,608)
----------- -----------
Net cash used in investing activities (11,692) (120,608)
FINANCING ACTIVITIES
Proceeds from issuance of notes payable -- 48,688
Proceeds from issuance of common stock 15,000 907,622
Proceeds from issuance of preferred stock -- (608,331)
----------- -----------
Net cash provided by financing activities 15,000 347,979
----------- -----------
Net decrease in cash and cash equivalents (1,056,025) (800,941)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 3,047,182 4,123,326
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 1,991,157 $ 3,322,385
=========== ===========
Supplemental schedule of non-cash transactions
Series A and B preferred stock converted into
common stock $ 859,167 $ 608,331
</TABLE>
See notes to financial statements.
5
<PAGE>
SpectraSCIENCE, Inc.
FORM 10-QSB
September 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," "estimates," "projects," "hopes" 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 September 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 nine-month periods ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
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 nine-month periods ended September 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"), trades on the Nasdaq SmallCap Market under the symbol SPSI.
(b) Results of Operations
The Company recorded no revenue for the three and nine months ended
September 30, 1997 and September 30, 1996.
Research and development expenses for the three and nine months ended
September 30, 1997 were $281,192 and $771,267 compared to $249,769 and $718,760
for the same periods in 1996. The increase of 12.6% for the three months ended
September 30, 1997 was primarily due to increase in salary expenses related to
the hiring of a Vice President of Development in November 1996 and other
personnel in the product development and regulatory affairs areas, and increase
in legal expenses associated with intellectual property. The increase of 7.3%
for the nine months ended September 30, 1997 was primarily due to personnel and
legal expenses mentioned above.
Selling, general and administrative expenses for the three and nine months
ended September 30, 1997 were $77,353 and $489,498 compared to $167,428 and
$519,357 for the same periods in 1996. The 53.8% decrease for the three months
ended September 30, 1997 was primarily due to a reduction in compensation
expense and related taxes. The decrease of 5.7% for the nine months ended
September 30, 1996 was primarily due to decreases in expenses mentioned above.
Interest and other income for the three and nine months ended September 30,
1997 were $31,437 and $104,796 compared to $43,601 and $140,018 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 nine months ended
September 30, 1997 were $327,108 and $1,155,969 compared to a net loss of
$373,596 and $1,098,099 for the same periods in 1996. In spite of the increase
in losses, the loss per share for the three and nine months ended September 30,
1997 were $0.07 and $0.26 compared to $0.10 and $0.35 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 as a result of the conversion of Series A and Series
B preferred stock into common stock.
7
<PAGE>
(c) Liquidity and Sources of Capital
Cash and cash equivalents on September 30, 1997 were $1,991,157 compared to
$3,047,182 on December 31, 1996. The decrease in the cash position from December
31, 1996 to September 30, 1997 was the result of the net loss for the nine
months ended September 30, 1997.
The working capital of the Company on September 30, 1997 was $1,848,021
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 nine months ended September
30, 1997 was $1,059,333 compared to $1,028,312 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 nine months ended September
30, 1997 was $11,692 compared to $120,608 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 nine months ended
September 30, 1997 was $15,000 compared to $347,979 for the same period in 1996.
The higher number in 1996 was primarily due to warrant exercises.
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 involving 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
Not Applicable
ITEM 5. Other Information
(a) Clinical Trials
Clinical trials on the Optical Biopsy System(TM) commenced at the
Massachusetts General Hospital, Boston, Massachusetts, in October 1997. The
other sites where clinical studies have commenced are the Mayo Clinic,
Rochester, Minnesota and the Hennepin County Medical Center, Minneapolis,
Minnesota.
(b) Insider Trading
On August 5, 1997, Mr. Brian T. McMahon, Chairman, President and Chief
Executive Officer of the Company, acquired 10,000 shares of common stock of the
Company on the open market at a price of $4.00 per share. As of September 30,
1997, Mr. McMahon directly owns 25,000 shares of the common stock of the
Company, and stock options for 639,065 shares of common stock, 316,666 of which
are exercisable within 60 days of September 30, 1997.
(c) Statement of Changes in Beneficial Ownership on Form 4
With the exception of one monthly Form 4 from Mr. Brian T. McMahon,
Chairman, President and Chief Executive Officer of the Company, which was
inadvertently filed late, all other Form 4's for officers and directors of the
Company were timely filed with the U.S. Securities and Exchange Commission.
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.
9
<PAGE>
SpectraSCIENCE, Inc.
FORM 10-QSB
September 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)
November 13, 1997 /s/ Brian T. McMahon
Date --------------------------------------------
BRIAN T. McMAHON
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
November 13, 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)
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS SUBMITTED IN THIS QUARTERLY REPORT ON FORM 10-QSB FOR THE
QUARTER ENDED SEPTEMBER 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> SEP-30-1997
<CASH> 1,991,157
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 172,917
<CURRENT-ASSETS> 2,222,780
<PP&E> 809,636
<DEPRECIATION> 640,656
<TOTAL-ASSETS> 2,391,761
<CURRENT-LIABILITIES> 374,759
<BONDS> 0
1,121,345
0
<COMMON> 0
<OTHER-SE> 895,657
<TOTAL-LIABILITY-AND-EQUITY> 2,391,761
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 358,545
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (31,437)
<INCOME-PRETAX> (327,108)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (327,108)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> 0
</TABLE>
