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, 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 November 12, 1998 was 4,732,804.
Transitional Small Business Disclosure Format (Check one): Yes ___ No _X_
<PAGE>
SPECTRASCIENCE, INC.
FORM 10-QSB
SEPTEMBER 30, 1998
INDEX
PAGE NO.
--------
PART I -- FINANCIAL INFORMATION 3
Balance Sheets - September 30, 1998 and December 31, 1997 3
Statements of Operations -
Three Months Ended September 30, 1998 and 1997
Nine Months Ended September 30, 1998 and 1997 4
Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 5
Notes to Financial Statements 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 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 9
SIGNATURES 10
EXHIBIT 27: FINANCIAL DATA SCHEDULE SUBMITTED PURSUANT
TO ARTICLE 5 OF REGULATION S-X 11
2
<PAGE>
PART I -- FINANCIAL INFORMATION
SPECTRASCIENCE, INC.
FORM 10-QSB
BALANCE SHEETS
September 30, December 31,
1998 1997 (1)
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 676,793 $ 1,638,173
Inventories 298,848 180,474
Other current assets 128,938 98,419
------------ ------------
Total current assets 1,104,579 1,917,066
Net property and equipment 36,106 155,046
------------ ------------
TOTAL ASSETS $ 1,140,685 $ 2,072,112
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 83,887 $ 140,809
Accrued compensation and taxes 87,076 100,690
Accrued expenses 117,966 61,019
Accrued clinical research fees 110,010 159,899
------------ ------------
Total current liabilities 398,939 462,417
SHAREHOLDERS' EQUITY
Common stock, $.25 par value:
Authorized shares--10,000,000
Issued and outstanding shares--
4,726,804 on September 30, 1998 and
4,506,559 on December 31, 1997 1,181,701 1,126,640
Additional paid-in capital 45,543,284 44,620,283
Accumulated deficit (45,983,239) (44,137,228)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 741,746 1,609,695
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,140,685 $ 2,072,112
============ ============
(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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ -- $ -- $ -- $ --
Cost of products sold -- -- -- --
----------- ----------- ----------- -----------
Gross profit -- -- -- --
Operating expenses
Research and development 344,005 281,192 1,286,912 771,267
Selling, general and
administrative 170,309 77,353 610,231 489,498
----------- ----------- ----------- -----------
Total operating expenses 514,314 358,545 1,897,143 1,260,765
Interest and other
income (expense) 13,403 31,437 51,132 104,796
----------- ----------- ----------- -----------
Net loss $ (500,911) $ (327,108) $(1,846,011) $(1,155,969)
=========== =========== =========== ===========
Net loss per share $ (0.11) $ (0.07) $ (0.40) $ (0.26)
Weighted average common
shares outstanding 4,714,627 4,480,705 4,640,659 4,456,948
</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
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,846,011) $(1,155,969)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation 137,908 50,230
Changes in operating assets
and liabilities:
Decrease in accounts receivable -- --
(Increase) decrease in inventories (118,374) 19,234
(Increase) decrease in other current assets (30,519) 45,030
(Decrease) in current liabilities (63,478) (17,858)
----------- -----------
Net cash used in operating activities (1,920,474) (1,059,333)
INVESTING ACTIVITIES
Purchase of property and equipment (18,968) (11,692)
----------- -----------
Net cash used in investing activities (18,968) (11,692)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 978,062 15,000
----------- -----------
Net cash provided by financing activities 978,062 15,000
----------- -----------
Net decrease in cash and cash equivalents (961,380) (1,056,025)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 1,638,173 3,047,182
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 676,793 $ 1,991,157
=========== ===========
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
SEPTEMBER 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 nine-month periods ended September 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 nine-month periods ended September 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 and
manufactures innovative, minimally-invasive "spectroscopic systems" to
facilitate real-time differentiation and diagnosis of cancerous and diseased
tissue 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 research and development efforts are 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. Additionally, effort will be directed towards ongoing
esophageal clinical studies, and conducting post-FDA approval market
surveillance studies to evaluate the ongoing safety and efficacy of the OBS. The
Company believes that the OBS will facilitate earlier detection of cancer, which
can lead to earlier, more effective treatment, improved patient quality of life
and survival rates, and reduced patient care costs.
The Company filed a Modular Pre-Market Approval (PMA) application with
the United States Food and Drug Administration (FDA) for its Optical BiopsyTM
System to detect colorectal cancer on September 14, 1998. The Company was
granted a "Modular Approach PMA Review" process which the FDA has stated is
intended to provide a faster track review process by "eliminating redundant
review of submission components and by the assignment of a dedicated team of
reviewers to the project, which is designed to be more efficient and facilitate
rapid closure at the end of the review process."
If the PMA application is approved by the FDA, the Company may need to
hire additional employees as it begins the process of commercializing the OBS.
The Company does not expect, however, to make any significant purchases of plant
and equipment over the next twelve months.
(b) RESULTS OF OPERATIONS
The Company recorded no revenues for the three and nine months ended
September 30, 1998 and September 30, 1997.
Research and development expenses for the three and nine months ended
September 30, 1998 were $344,005 and $1,286,912 compared to $281,192 and
$771,267 for the same periods in 1997. The increase of 22.3% for the three
months ended September 30, 1998 was primarily
7
<PAGE>
due to an increase in salary expense related to engineering documentation
personnel not employed with the Company during the same period in 1997,
increased consulting expenses, and increased expenses related to clinical trial
agreements. The 66.9% increase for the nine months ended September 30, 1998 was
primarily due to increased personnel and consulting expenses, and an inventory
revaluation completed during the second quarter of 1998.
Selling, general and administrative expenses for the three and nine
months ended September 30, 1998 were $170,309 and $610,231 compared to $77,353
and $489,498 for the same periods in 1997. The 120.2% increase for the three
months ended September 30, 1998 was primarily due to increased salary expense,
increased consulting and travel expenses related to investor relations
activities, and increased legal and administrative expenses related to the
filing of the Form SB-2 Registration Statement and Amendment No. 1 thereto
relating to the registration of up to 2,875,000 shares of the Company's Common
Stock. (See Item 5 of Part II of this Form 10-QSB). The increase of 24.7% for
the nine months ended September 30, 1998 was due to the increase in expenses
related to personnel, investor relations, and filing of the Form SB-2
Registration Statement described above, and partially offset by reduced
shareholder and general insurance expenses.
Interest and other income for the three and nine months ended September
30, 1998 were $13,403 and $51,132 compared to $31,437 and $104,796 for the same
periods in 1997. These 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 nine months
ended September 30, 1998 was $500,911 and $1,846,011 compared to a net loss of
$327,108 and $1,155,969 for the same periods in 1997. The net loss per share for
the three and nine months ended September 30, 1998 was $0.11 and $0.40 compared
to $0.07 and $0.26 for the same periods in 1997.
(c) LIQUIDITY AND SOURCES OF CAPITAL
Cash and cash equivalents on September 30, 1998 were $676,793 compared
to $1,638,173 on December 31, 1997. The decrease in the cash position from
December 31, 1997 to September 30, 1998 was the result of the net loss during
the nine-month period that ended September 30, 1998.
The working capital of the Company on September 30, 1998 was $705,640
compared to $1,454,649 on December 31, 1997. This decrease was primarily due to
a reduction of the cash position and an increase in current liabilities due to
clinical agreements.
Net cash used in operating activities for the nine months ended
September 30, 1998 was $1,920,474 compared to $1,059,333 for the same period in
1997. This increase was primarily due to the higher net loss for the nine months
ended September 30, 1998 compared to the same period in 1997.
Net cash used in investing activities for the nine months ended
September 30, 1998 was $18,968 compared to $11,692 for the same period in 1997.
This increase was due to additional purchases of property and equipment in 1998.
Net cash provided by financing activities for the nine months ended
September 30, 1998 was $978,062 compared to $15,000 for the same period in 1997.
The increase was due to the exercise of additional stock options and warrants in
1998.
8
<PAGE>
Management believes that the amount of cash and cash equivalents is
adequate to fund operations at least through December 1998. The Company is also
in the process of registering shares of its Common Stock for the purpose of
raising additional capital for the Company. (See Item 5 of Part II of this Form
10-QSB).
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about September 4, 1998, the Company was served with a Complaint
in the case Paul Gibson v. SpectraScience, Inc. (Minn. 4th Jud. Dist.),
claiming that the plaintiff, at one time a financial consultant to the Company,
was entitled to receive options for 50,000 shares of the Company's Common Stock
at an exercise price of $2.50 per share. The consultant was retained to
successfully complete a proposed Private Placement financing. The stock options
were to vest upon the successful closing of the proposed financing on or before
December 31, 1994. The proposed financing did not occur. The parties are in the
process of exchanging information in the case. The Company strongly believes the
claim to lack merit and intends to defend itself vigorously.
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) REGISTRATION STATEMENT ON FORM SB-2 FOR 2,875,000 SHARES OF COMMON
STOCK
The Company filed Amendment No. 1 to Form SB-2 Registration Statement
on October 7, 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) OPTION AND WARRANT EXERCISES
In September 1998, stock options to purchase 12,700 shares of Common
Stock were exercised. This resulted in net proceeds to the Company of
$50,006.25.
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, 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)
NOVEMBER 13, 1998 /s/ BRIAN T. MCMAHON
- ----------------- -------------------------------------------
Date BRIAN T. MCMAHON
Chairman and Chief Executive Officer
(Principal Executive Officer,
Principal Financial and Accounting Officer)
NOVEMBER 13, 1998 /s/ CHESTER E. SIEVERT, JR.
- ----------------- -------------------------------------------
Date CHESTER E. SIEVERT, JR.
President and Chief Operating 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, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 676,793
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 298,848
<CURRENT-ASSETS> 1,104,579
<PP&E> 829,104
<DEPRECIATION> (792,998)
<TOTAL-ASSETS> 1,140,685
<CURRENT-LIABILITIES> 398,939
<BONDS> 0
0
0
<COMMON> 1,181,701
<OTHER-SE> (439,955)
<TOTAL-LIABILITY-AND-EQUITY> 1,140,685
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 514,314
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (13,403)
<INCOME-PRETAX> (500,911)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (500,911)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> 0
</TABLE>
