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 MARCH 31, 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 May 13, 1998 was 4,714,104.
Transitional Small Business Disclosure Format (Check one): Yes ___ No _X_
<PAGE>
SPECTRASCIENCE, INC.
FORM 10-QSB
MARCH 31, 1998
TABLE OF CONTENTS
PAGE
NO.
PART I -- FINANCIAL INFORMATION................................................3
ITEM 1. Financial Statements (Unaudited)...................................3
BALANCE SHEETS.........................................................3
STATEMENTS OF OPERATIONS (Unaudited)...................................4
STATEMENTS OF CASH FLOW (Unaudited)....................................5
NOTES TO FINANCIAL STATEMENTS..........................................6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................6
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..................................................8
ITEM 6. Exhibits and Reports on Form 8-K...................................9
SIGNATURES....................................................................10
EXHIBIT 27: FINANCIAL DATA SCHEDULE.......................................E27-1
EXHIBIT 99: FORWARD-LOOKING STATEMENTS....................................E99-1
<PAGE>
SPECTRASCIENCE, INC.
FORM 10-QSB
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997(1)
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,357,221 $ 1,638,173
Inventory 406,905 180,474
Other current assets 71,601 98,419
------------ ------------
Total current assets 1,835,727 1,917,066
Net fixed assets 146,973 155,046
------------ ------------
TOTAL ASSETS $ 1,982,700 $ 2,072,112
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 124,953 $ 140,809
Accrued compensation and taxes 62,179 100,690
Accrued expenses 61,161 61,019
Accrued clinical research fees 87,010 159,899
------------ ------------
Total current liabilities 335,303 462,417
Commitments
SHAREHOLDERS' EQUITY
Common stock, $.25 par value:
Authorized shares--10,000,000
Issued and outstanding shares--
4,624,338 on March 31, 1998 and
4,506,559 on December 31, 1997 1,156,085 1,126,640
Additional paid-in capital 45,166,399 44,620,283
Accumulated deficit (44,675,087) (44,137,228)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 1,647,397 1,609,695
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,982,700 $ 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.
<PAGE>
SPECTRASCIENCE, INC.
FORM 10-QSB
STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31
------------------------------------
1998 1997
---- ----
Revenue $ -- $ --
Cost of products sold -- --
----------- -----------
Gross profit -- --
Operating expenses
Research and development 337,929 264,058
Selling, general and
administrative 219,140 223,837
----------- -----------
Total operating expenses 557,069 487,895
Interest and other income 19,210 38,765
----------- -----------
Net loss $ (537,859) $ (449,130)
=========== ===========
Net loss per common share $ (0.12) $ (0.10)
Weighted average common
shares outstanding 4,521,843 4,408,972
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
SPECTRASCIENCE, INC.
FORM 10-QSB
STATEMENTS OF CASH FLOW (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (537,859) $ (449,130)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation 14,446 17,864
Changes in operating assets
and liabilities:
Decrease in accounts receivable -- --
(Increase) decrease in inventories (226,431) 4,232
Decrease in other current assets 26,818 9,554
(Decrease) increase in current liabilities (127,114) 39,391
----------- -----------
Net cash used in operating activities (850,140) (378,089)
INVESTING ACTIVITIES
Purchase of fixed assets (6,373) (2,936)
----------- -----------
Net cash used in investing activities (6,373) (2,936)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 575,561 --
----------- -----------
Net cash provided by financing activities 575,561 --
Net decrease in cash and cash equivalents (280,952) (381,025)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 1,638,173 3,047,182
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 1,357,221 $ 2,666,157
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Series A and B preferred stock converted into
common stock $ -- $ 859,167
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
SPECTRASCIENCE, INC.
FORM 10-QSB
MARCH 31, 1998
- --------------------------------------------------------------------------------
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 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 month period ended March 31, 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 1997, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 128, "EARNINGS PER SHARE" (the Statement). 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 quarter ended March 31, 1998,
there is no difference between basic earnings per share under Statement No. 128
and primary net loss per share as reported.
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
<PAGE>
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, which is currently targeted for use in the detection and
differentiation of cancerous, pre-cancerous and healthy tissues in the
gastrointestinal tract using minimally-invasive endoscopic techniques, and to a
lesser extent, the Spectroscopic Guidewire(TM) System, 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 months ended March 31,
1998 and March 31, 1997. As a result, the cost of products sold and gross profit
for the three months ended March 31, 1998 and March 31, 1997 were zero.
Research and development expenses for the three months ended March
31, 1998 were $337,929 compared to $264,058 for the same period in 1997. The
increase of 28.0% for the three months ended March 31, 1998 was primarily due to
increases in expenses associated with the Company's multi-center clinical
studies for the early detection of colon cancer and esophageal cancer utilizing
its Optical Biopsy(TM) System, higher regulatory consulting expenses, and the
hiring of two additional individuals associated with research and development.
The Company also experienced increased legal expenses associated with patent
filing and protection. These increases were partially offset by the termination
of the clinical feasibility study contract with the Massachusetts General
Hospital, which cost approximately $50,000 per quarter, and was terminated in
March 1997. Massachusetts General Hospital remains one of the sites where the
Company is conducting on-going clinical trials on endoscopic techniques
utilizing the Company's Optical Biopsy(TM) System.
Selling, general and administrative expenses for the three months
ended March 31, 1998 were $219,140 compared to $223,837 for the same period in
1997. The decrease of 2.1% for the three months ended March 31, 1998 was
primarily due to the elimination of a receptionist but was somewhat offset by an
increase in investor relations expenses and related expenses as a result of
hiring a consulting company. The consulting company assisted the Company to put
together "road-shows" in order to introduce the Company to brokers, analysts and
investors in various cities throughout the United States.
Interest and other income for the three months ended March 31, 1998
was $19,210 compared to $38,765 for the same period in 1997. The decrease of
50.4% was primarily due to lower balances in cash and cash equivalents.
As a result of the above, the net loss for the three months ended
March 31, 1998 was $537,859 compared to a net loss of $449,130 for the same
period in 1997. This represented an increase of 19.8% in net loss compared to
the same period in 1997. The net loss per share for the three months ended March
31, 1998 was $.12 compared to $.10 for the same period in 1997.
(c) LIQUIDITY AND SOURCES OF CAPITAL
Cash and cash equivalents on March 31, 1998 were $1,357,221 compared
to $1,638,173 on December 31, 1997. The decrease in the Company's cash position
from December 31, 1997 to March 31, 1998 was primarily the result of the net
loss during the three month period that ended March 31, 1998, an increase of
$226,431 in inventory, and a decrease in current liabilities primarily due to
the payment of fees associated with the Company's clinical studies on the
Optical Biopsy(TM) System.
<PAGE>
The working capital of the Company on March 31, 1998 was $1,500,424
compared to $1,454,649 on December 31, 1997. This increase of 3.1% was primarily
due to a reduction in current liabilities associated with clinical research
studies fees.
Net cash used in operating activities for the three months ended
March 31, 1998 was $850,140 compared to $378,089 for the same period in 1997.
This increase of 124.9% was primarily due to the higher expenses associated with
research and development, an increase in inventory, and a decrease in current
liabilities in 1998 compared to 1997.
Net cash used in investing activities for the three months ended
March 31, 1998 was $6,373 compared to $2,936 for the same period in 1997. This
increase was due to higher purchases of computer equipment in 1998.
Net cash provided by financing activities for the three months ended
March 31, 1998 was $575,561 compared to $0 for the same period in 1997. The
additional cash provided for the quarter ended March 31, 1998 was the result of
(a) an option exercise for 6,667 shares of the Common Stock at $3.00 per share,
and (b) warrant exercises for 111,112 shares of the Common Stock at $5.00 per
share by shareholders who invested in the Company's issuance of Series A
Convertible Preferred Stock in June 1995. In the first quarter of 1997, all the
outstanding shares of Series A and B Convertible Preferred Stock were converted
to Common Stock, but these were non-cash conversions. There was no preferred
stock of the Company outstanding on March 31, 1998.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of March 31, 1998, there were 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
Not Applicable
ITEM 5. OTHER INFORMATION
(a) PATENT APPLICATIONS
In the quarter ended March 31, 1998, the Company filed two patents
with the United States Patent and Trademark Office on its Optical Biopsy(TM)
System.
(b) OPTION AND WARRANT EXERCISES
In February 1998, an option holder exercised its option to purchase
6,667 shares of Common Stock at $3.00 per share. This resulted in net proceeds
to the Company of $20,001.
In March 1998, various warrant holders exercised their warrants to
purchase 111,112 shares of Common Stock at $5.00 per share. This resulted in net
proceeds to the Company of $555,560. In April
<PAGE>
1998, other warrant holders exercised their warrants to purchase 37,333 shares
of Common Stock at $5.00 per share. This resulted in additional 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") which
closed on June 29, 1995, will expire on or before June 29, 1998. As of May 13,
1998, the remaining warrants associated with Preferred A, exercisable at $5.00
per share, amounted to 41,111 shares. If exercised, these remaining $5.00
warrants would raise an additional $205,555 in net proceeds to the Company.
There can be no assurance that these warrants will be exercised.
(c) NASDAQ SMALLCAP MARKET CONTINUED LISTING
The Company's Common Stock was listed for trading on the Nasdaq
SmallCap Market on May 15, 1996 under the symbol SPSI. On August 22, 1997, the
Securities and Exchange Commission approved new listing standards for companies
listed on The Nasdaq SmallCap Market. These changes increased the quantitative
threshold criteria necessary to qualify for initial entry and continued listing
on Nasdaq. In addition, corporate governance requirements, formerly applicable
only to the Nasdaq National Market System, were extended to the Nasdaq SmallCap
Market. Even under these more stringent standards, the Company has complied with
all requirements for continued listing on the Nasdaq SmallCap Market, with the
exception of the requirement that the Company maintain a minimum of (i) $2
million in net tangible assets or (ii) $35 million market capitalization or
(iii) $500,000 of net income in the latest fiscal year or two of the last three
fiscal years.
The Company was informed by Nasdaq on April 3, 1998 regarding this
exception, and responded to Nasdaq on April 17, 1998. As part of the agreement
with Nasdaq, the Company will submit a financing plan to Nasdaq in the second
quarter of fiscal 1998 that should enable the Company to meet all of the
requirements for continued listing on the Nasdaq SmallCap Market.
(d) CLINICAL STUDIES
During the three months ended March 31, 1998, the Company has
performed clinical studies on the Company's Optical Biopsy(TM) System at three
hospitals to test the clinical utility of the Optical Biopsy(TM) System to
detect colon cancer. The clinical trial utilizing the Optical Biopsy(TM) System
for the detection of esophageal cancer is continuing.
The Company met with the Gastroenterology/Urology Branch ("Branch")
of the United States Food and Drug Administration ("FDA") in Washington DC on
April 27, 1998, to review data, clinical protocols and clinical results
collected during its recent multicenter clinical trials for spectrophotometric
identification of potentially cancerous lesions (polyps) in the colon. The
algorithm, methods of analysis and clinical study design were considered
"appropriate" by the Branch. Additional patient data is required to further
demonstrate the reproducibility of the algorithm's accuracy. The Company
believes that it will submit an application to the FDA for marketing clearance,
sometime in fiscal 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT 27: Financial Data Schedule pursuant to Article 5 of Regulation S-X.
EXHIBIT 99: Forward-Looking Statements
FORM 8-K: No reports on Form 8-K were filed by the Company during the quarter
covered by this report.
<PAGE>
SPECTRASCIENCE, INC.
FORM 10-QSB
MARCH 31, 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)
MAY 15, 1998 /s/ BRIAN T. MCMAHON
Date BRIAN T. MCMAHON
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
MAY 15, 1998 /s/ CHING-MENG CHEW
Date CHING-MENG CHEW
Vice President of Finance and Administration
Chief Financial Officer, Treasurer and
Corporate Secretary
(Principal Financial and Accounting Officer)
SPECTRASCIENCE, INC.
EXHIBIT 99: FORWARD-LOOKING STATEMENTS
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 "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 ARE ADVISED THAT THE FACTORS LISTED BELOW
MAY 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. THE FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS EXHIBIT ARE MADE AS OF THE DATE OF THIS FORM 10-QSB, AND THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE SUCH FORWARD-LOOKING STATEMENTS OR TO
UPDATE THE REASONS WHY ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS.
RISK FACTORS
AN INVESTMENT IN ANY SECURITY OFFERED BY THE COMPANY INVOLVES A HIGH DEGREE OF
RISK. INVESTORS CONTEMPLATING AN INVESTMENT IN ANY SECURITY OF THE COMPANY, SUCH
AS ITS COMMON STOCK, SHOULD CAREFULLY CONSIDER ALL THE RISKS ASSOCIATED WITH
SUCH AN INVESTMENT, IN ADDITION TO THE FOLLOWING RISK FACTORS.
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 necessary to obtain regulatory
approvals, the rate and cost 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 it will be required to raise substantial additional capital,
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
<PAGE>
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. In addition, the Company's Common Stock is
thinly-traded and, as a result, trades in a small number of shares of the
Company's Common Stock, whether on the buying side or the selling side, may
result in significant price movements.
UNCERTAINTY OF MARKET ACCEPTANCE; NEED FOR REGULATORY APPROVAL
Sales to date have been limited and only to a [small] number of the
Company's guidewires for cardiovascular applications. The Company has had no
revenues on its Optical Biopsy(TM) System or its components. 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
The Company has on-going clinical trials for the spectroscopic
detection of colon and esophageal cancer utilizing the Company's Optical
Biopsy(TM) System. Results from such clinical studies, and future clinical
studies in other specialty applications, are used to develop algorithms to
interpret the spectrophotometric signals obtained during the clinical
procedures, and to support applications to the Food and Drug Administration
("FDA") for market clearance. There can be no assurance that clinical results
will be encouraging or that the algorithms will be sufficiently accurate in
detecting cancerous tissues. Other risks attendant with the clinical trials
include the unpredictability of the time frame for completion due to possible
patient unavailability, potential changes in hospital procedures and policies,
and potential changes in the principal investigators leading such clinical
trials.
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 its products and processes in
order to preserve its trade secrets and to operate without infringing upon the
proprietary rights of third parties. Although the Company has been awarded
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.
<PAGE>
RISK OF PATENT LITIGATION
The Company could incur substantial costs in defending itself in suits
brought against it with respect to patent rights 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 defaults by the Company. There can be no assurance
that defaults will not occur in the future. If a default were to occur 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 of its 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 a material 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 that are currently providing services in
software development, statistical analysis and regulatory compliance and
submissions. Risks attendant to the use of consultants include possible concerns
as to their competence and availability on short notice. The Company also relies
on contract manufacturers. These contract manufacturers are subject to audit by
the Food and Drug Administration ("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 potential inability to obtain products on a timely basis, and
a possible reduction in the Company's control over the manufacturing process,
costs, inventory control and maintenance of proprietary information.
OPERATING LOSS AND ACCUMULATED DEFICIT
The Company has incurred net losses since its inception. 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 in the future due primarily to additional research and
development expenses and expects to continue to incur substantial net operating
losses. There can be no assurance that the Company will be a able to market its
products successfully or ever achieve or sustain profitability.
<PAGE>
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 an 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 might 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 the Company, 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 therefore could 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, such events could have a material
adverse effect on the Company's business, financial condition and results of
operations.
UNCERTAINTY OF HEALTH CARE REIMBURSEMENT AND POTENTIAL 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
<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 MARCH 31, 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> MAR-31-1998
<CASH> 1,357,221
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 406,905
<CURRENT-ASSETS> 1,835,727
<PP&E> 816,509
<DEPRECIATION> 669,536
<TOTAL-ASSETS> 1,982,700
<CURRENT-LIABILITIES> 335,303
<BONDS> 0
0
0
<COMMON> 1,156,085
<OTHER-SE> 491,392
<TOTAL-LIABILITY-AND-EQUITY> 1,982,700
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
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<OTHER-EXPENSES> 557,069
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (19,210)
<INCOME-PRETAX> (537,859)
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<NET-INCOME> (537,859)
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