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, 1998
[ ] 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 12, 1998 was 4,714,104.
Transitional Small Business Disclosure Format (Check one): Yes ___ No _X_
<PAGE>
SPECTRASCIENCE, INC.
FORM 10-QSB
JUNE 30, 1998
INDEX
PAGE NO.
--------
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets -- June 30, 1998 and December 31, 1997 3
Statements of Operations -- Three Months Ended June 30, 1998 and 1997 4
Six Months Ended June 30, 1998 and 1997
Statements of Cash Flows -- Six Months Ended June 30, 1998 and 1997 5
Notes to Financial Statements -- June 30, 1998 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
PART II -- OTHER INFORMATION
8
ITEM 1. LEGAL PROCEEDINGS 8
ITEM 2. CHANGES IN SECURITIES 8
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8
ITEM 5. OTHER INFORMATION 9
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
2
<PAGE>
PART I -- FINANCIAL INFORMATION
SPECTRASCIENCE, INC.
FORM 10-QSB
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997(1)
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,136,522 $ 1,638,173
Inventories 301,295 180,474
Other current assets 95,084 98,419
------------ ------------
Total current assets 1,532,901 1,917,066
Net property and equipment 41,934 155,046
------------ ------------
TOTAL ASSETS $ 1,574,835 $ 2,072,112
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 121,965 $ 140,809
Accrued compensation and taxes 83,903 100,690
Accrued expenses 106,306 61,019
Accrued clinical research fees 70,010 159,899
------------ ------------
Total current liabilities 382,184 462,417
Commitments
SHAREHOLDERS' EQUITY
Common stock, $.25 par value:
Authorized shares--10,000,000
Issued and outstanding shares--
4,714,104 on June 30, 1998 and
4,506,559 on December 31, 1997 1,178,526 1,126,640
Additional paid-in capital 45,496,453 44,620,283
Accumulated deficit (45,482,328) (44,137,228)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 1,192,651 1,609,695
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,574,835 $ 2,072,112
============ ============
</TABLE>
(1) THE BALANCE SHEET ON DECEMBER 31, 1997 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
--------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ -- $ -- $ -- $ --
Cost of products sold -- -- -- --
----------- ----------- ----------- -----------
Gross profit -- -- -- --
Operating expenses
Research and development 604,978 226,017 942,907 490,075
Selling, general and
Administrative 220,782 188,309 439,922 412,146
----------- ----------- ----------- -----------
Total operating expenses 825,760 414,326 1,382,829 902,221
Interest and other
Income (expense) 18,519 34,594 37,729 73,359
----------- ----------- ----------- -----------
Net loss $ (807,241) $ (379,732) $(1,345,100) $ (828,862)
=========== =========== =========== ===========
Net loss per share $ (0.17) $ (0.08) $ (0.29) $ (0.19)
Weighted average common
Shares outstanding 4,683,390 4,480,379 4,603,063 4,444,873
</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
---------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,345,100) $ (828,862)
Adjustments to reconcile net loss to cash
Used in operating activities:
Depreciation 126,352 34,900
Changes in operating assets
and liabilities:
Decrease in accounts receivable -- --
(Increase) decrease in inventories (120,821) 9,232
Decrease in other current assets 3,335 32,106
(Decrease) increase in current liabilities (80,233) 39,384
----------- -----------
Net cash used in operating activities (1,416,467) (713,240)
INVESTING ACTIVITIES
Purchase of property and equipment (13,240) (6,695)
----------- -----------
Net cash used in investing activities (13,240) (6,695)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 928,056 --
----------- -----------
Net cash provided by financing activities 928,056 --
----------- -----------
Net decrease in cash and cash equivalents (501,651) (719,935)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 1,638,173 3,047,182
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 1,136,522 $ 2,327,247
=========== ===========
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, 1998
- --------------------------------------------------------------------------------
SPECTRASCIENCE, INC. (THE "COMPANY") DESIRES TO TAKE ADVANTAGE OF THE "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. INVESTORS CONTEMPLATING AN INVESTMENT IN ANY
SECURITY OFFERED BY THE COMPANY, SUCH AS ITS COMMON STOCK, SHOULD NOTE THAT SUCH
INVESTMENTS INVOLVE A HIGH DEGREE OF RISK, AND INVESTORS ARE CAUTIONED TO
CAREFULLY CONSIDER ALL THE RISKS ASSOCIATED WITH SUCH AN INVESTMENT. PLEASE
REFER TO EXHIBIT 99 OF THE COMPANY'S QUARTERLY REPORT ON FORM 10-QSB FOR THE
QUARTER ENDED MARCH 31, 1998, 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, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998. 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, 1997.
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 1998, 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, 1998. For the three- and six-month periods ended June 30, 1998,
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 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, and the
name change was approved by the Company's shareholders on May 13, 1993. The
Company's common stock, par value $.25 per share (the "Common Stock"), is traded
on the Nasdaq SmallCap Market under the symbol SPSI.
The Company's corporate offices are located at 3650 Annapolis Lane,
Suite 101, Minneapolis, Minnesota 55447-5434. The Company's telephone number is
612/509-9999, its fax number is 612/509-9805, and its e-mail address is
[email protected]. The Company also has a web-site which can be accessed
at http://www.spectrascience.com.
The Company's development effort is focused on the Optical Biopsy(TM)
System, ("OBS") which is an endoscopic biopsy forceps system employing
proprietary flourescence spectroscopy technology used for the differentiation
and diagnosis between healthy and cancerous tissues in the gastrointestinal
tract, and to a lesser extent, the Spectroscopic Guidewire(TM) System, ("SGS")
which is currently targeted for the detection of intra-coronary thrombus and
differentiation of atherosclerotic plaque.
(b) RESULTS OF OPERATIONS
The Company recorded no revenue for the three and six months ended June
30, 1998 and June 30, 1997.
Research and development expenses for the three and six months ended
June 30, 1998 were $604,978 and $942,907 compared to $226,017 and $490,075 for
the same periods in 1997. The increase of 167.7% for the three months ended June
30, 1998 was primarily due to an increase in salary expense related to
engineering documentation personnel not with the company during the same period
in 1997, increased consulting and travel expense related in part to the PMA
pre-submission meeting with the United States Food and Drug Administration
("FDA"), and an inventory revaluation due to the replacement of the SGS Console
with second generation technology currently utilized in the Company's OBS
System. The 92.4% increase for the six months ended June 30, 1998 was primarily
due to increased personnel and consulting expenses, and the inventory
revaluation mentioned above.
Selling, general and administrative expenses for the three and six
months ended June 30, 1998 were $220,782 and $439,922 compared to $188,309 and
$412,146 for the same periods in 1997. The 17.2% increase for the three months
ended June 30, 1998 was primarily due to increased consulting expenses related
to investor relations activities and, to a lesser extent, increased legal
expenses. The increase of 6.7% for the six months ended June 30, 1998 was
primarily due to increases in expenses mentioned above and partially offset by
decreased expenses for the annual shareholders meeting and wages.
Interest and other income for the three and six months ended June 30,
1998 were $18,519 and $37,729 compared to $34,594 and $73,359 for the same
periods in 1997. The decreases were 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, 1998 was $807,241 and $1,345,100 compared to a net loss of
$379,732 and $828,862 for the same periods in 1997. The net loss per share for
the three and six months ended June 30, 1998 was $0.17 and $0.29 compared to
$0.08 and $0.19 for the same periods in 1997.
7
<PAGE>
(c) LIQUIDITY AND SOURCES OF CAPITAL
Cash and cash equivalents on June 30, 1998 were $1,136,522 compared to
$1,638,173 on December 31, 1997. The decrease in the cash position from December
31, 1997 to June 30, 1998 was the result of the net loss during the six-month
period that ended June 30, 1998.
The working capital of the Company on June 30, 1998 was $1,150,717
compared to $1,454,649 on December 31, 1997. 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,
1998 was $1,416,467 compared to $713,240 for the same period in 1997. This
increase was primarily due to the higher net loss for the six months ended June
30, 1998 compared to the same period in 1997.
Net cash used in investing activities for the six months ended June 30,
1998 was $13,240 compared to $6,695 for the same period in 1997. This increase
was due to purchases of property and equipment in 1998.
Net cash provided by financing activities for the six months ended June
30, 1998 was $928,056 compared to $0 for the same period in 1997. The increase
was due to the exercise of stock options and warrants.
Management believes that the amount of cash and cash equivalents is
adequate to fund operations at least through December 1998.
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 28, 1998, as
filed with the Securities and Exchange Commission on April 20, 1998, File No.
0-13092.
(a) The Annual Meeting of Shareholders of SPECTRASCIENCE, Inc. (the
"Meeting") was held on May 28, 1998
Shareholders of record at the close of business on March 31, 1998, (the
"Record Date") were entitled to receive notice of and to vote at the
Meeting and any adjournment thereof. On the Record Date, 4,624,338
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
3,791,226 Shares, or 82.0% 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
8
<PAGE>
The only item submitted to a vote of the shareholders 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 3,725,230 80.6% 65,996 1.4%
Henry M. Holterman 3,753,472 81.2% 37,754 0.8%
Nathaniel S. Thayer 3,752,802 81.2% 38,424 0.8%
</TABLE>
There were no broker non-votes for this item.
ITEM 5. OTHER INFORMATION
(a) REGISTRATION STATEMENT ON FORM SB-2 FOR 2,875,000 SHARES OF COMMON
STOCK
The Company filed a registration statement on Form SB-2 on July 17,
1998 with the Securities and Exchange Commission (File No. 333-59395) (the
"Registration Statement") for the proposed sale by the Company of up to
2,500,000 shares of its common stock. The Registration Statement also includes
the underwriters' over-allotment option for an additional 375,000 shares.
Josephthal & Co. Inc. is acting as representative of the several underwriters.
(b) NASDAQ SMALLCAP MARKET CONTINUED LISTING
Upon completion of the offering contemplated by the Registration
Statement, the Company expects to satisfy all of the requirements for continued
listing on the Nasdaq SmallCap Market. The Company does not anticipate any
potential delisting from the Nasdaq SmallCap Market prior to the completion of
the secondary public offering, which is anticipated to be completed sometime in
third quarter 1998.
(c) OPTION AND WARRANT EXERCISES
In May 1998, Brian McMahon, Chairman and Chief Executive Officer of the
Company, exercised stock options to purchase 43,333 shares of Common Stock at
$3.00 per share. This resulted in net proceeds to the Company of $129,999. Of
the 43,333 shares of Common Stock, 10,000 shares were sold in the open market to
cover the cost of the option exercises. Mr. McMahon currently owns 58,333 shares
of Common Stock.
In May 1998, Ching-Meng Chew, then Vice President of Finance and
Administration, Chief Financial Officer, and Secretary of the Company, exercised
stock options to purchase 9,100 shares of Common Stock at $3.9375 per share.
This resulted in net proceeds to the Company of $35,831.25.
In April 1998, various warrantholders exercised their warrants to
purchase 37,333 shares of Common Stock at $5.00 per share. This resulted in net
proceeds to the Company of $186,665.
All remaining warrants that were issued to investors in the Company's
issuance of Series A Convertible Preferred Stock ("Preferred A"), expired on or
before June 29, 1998. As a result, there were no remaining warrants associated
with Preferred A.
(d) CLINICAL STUDIES
During the three months ended June 30, 1998, clinical studies were
performed to evaluate the Company's Optical BiopsyTM System for the detection of
colon cancer. After a PMA pre-submission meeting with the United States Food and
Drug Administration ("FDA"), at which the results of the clinical studies were
presented, a smaller clinical study was deemed necessary to demonstrate
reproducibility of the
9
<PAGE>
results prior to filing the pre-market approval application. The Company expects
to complete the additional clinical trials and anticipates submitting its
pre-market approval application to the FDA for marketing clearance during the
third quarter of 1998.
(e) RESIGNATION OF CHIEF FINANCIAL OFFICER
Ching-Meng Chew, the Company's Vice President of Finance and
Administration, Chief Financial Officer, and Secretary since August 1995,
submitted his resignation to the Company, effective August 1, 1998, to pursue
other business interests. The Company intends to seek a replacement for Mr.
Chew.
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, 1998
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 14, 1998 /s/ BRIAN T. MCMAHON
- ------------------------ -------------------------------------------
Date BRIAN T. MCMAHON
Chairman and Chief Executive Officer
(Principal Executive Officer,
Principal Financial and Accounting Officer)
AUGUST 14, 1998 /s/ CHESTER E. SIEVERT, JR.
- ------------------------ -------------------------------------------
Date CHESTER E. SIEVERT, JR.
President and Chief Operating Officer
11
<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 JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,136,522
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 301,295
<CURRENT-ASSETS> 1,532,901
<PP&E> 823,376
<DEPRECIATION> 781,442
<TOTAL-ASSETS> 1,574,835
<CURRENT-LIABILITIES> 382,184
<BONDS> 0
1,178,526
0
<COMMON> 0
<OTHER-SE> 14,125
<TOTAL-LIABILITY-AND-EQUITY> 1,574,835
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,382,829
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (37,729)
<INCOME-PRETAX> (1,345,100)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,345,100)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> 0
</TABLE>
