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, 1999
[ ] 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 14, 1999 was 5,296,720.
Transitional Small Business Disclosure Format (Check one): Yes ___ No _X_
<PAGE>
SPECTRASCIENCE, INC.
FORM 10-QSB
MARCH 31, 1999
TABLE OF CONTENTS
PAGE
NO.
PART I -- FINANCIAL INFORMATION................................................3
ITEM 1. FINANCIAL STATEMENTS..............................................3
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.................................10
SIGNATURES....................................................................11
EXHIBIT 27: FINANCIAL DATA SCHEDULE
EXHIBIT 99: FORWARD-LOOKING STATEMENTS
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PART I -- FINANCIAL INFORMATION
SPECTRASCIENCE, INC.
FORM 10-QSB
BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998(1)
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,976,112 $ 301,970
Inventory 193,197 185,625
Other current assets 71,636 85,253
------------ ------------
Total current assets 2,240,945 572,848
Net fixed assets 245,795 247,531
------------ ------------
TOTAL ASSETS $ 2,486,740 $ 820,379
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 206,384 $ 281,986
Accrued compensation and taxes 132,804 99,263
Accrued expenses 60,919 56,990
Accrued clinical research fees 147,372 162,400
------------ ------------
Total current liabilities 547,479 600,639
Commitments
SHAREHOLDERS' EQUITY
Common stock, $.25 par value:
Authorized--10,000,000 shares
Issued and outstanding--
5,296,720 shares on March 31, 1999 and
4,737,804 shares on December 31, 1998 1,324,180 1,184,451
Additional paid-in capital 47,626,744 45,586,659
Accumulated deficit (47,011,663) (46,551,370)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 1,939,261 219,740
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 2,486,740 $ 820,379
============ ============
</TABLE>
(1) THE BALANCE SHEET ON DECEMBER 31, 1998 IS 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 3
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SPECTRASCIENCE, INC.
FORM 10-QSB
STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31
----------------------------
1999 1998
---- ----
Operating expenses
Research and development 282,024 337,929
Selling, general and
administrative 193,507 219,140
------------ ------------
Total operating expenses 475,531 557,069
Interest and other income 15,238 19,210
------------ ------------
Net loss $ (460,293) $ (537,859)
============ ============
Net loss per common share $ (0.09) $ (0.12)
Weighted average common
Shares outstanding 4,908,101 4,521,843
SEE NOTES TO FINANCIAL STATEMENTS.
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SPECTRASCIENCE, INC.
FORM 10-QSB
STATEMENTS OF CASH FLOW (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
----------------------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (460,293) $ (537,859)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation 14,144 14,446
Changes in operating assets and liabilities:
Decrease in accounts receivable -- --
(Increase) decrease in inventories (7,572) (226,431)
Decrease in other current assets 13,617 26,818
(Decrease) increase in current liabilities (53,160) (127,114)
------------ ------------
Net cash used in operating activities (493,264) (850,140)
INVESTING ACTIVITIES
Purchase of fixed assets (12,408) (6,373)
------------ ------------
Net cash used in investing activities (12,408) (6,373)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 2,179,814 575,561
------------ ------------
Net cash provided by financing activities 2,179,814 575,561
Net increase (decrease) in cash and cash equivalents 1,674,142 (280,952)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 301,970 1,638,173
------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 1,976,112 $ 1,357,221
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
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SPECTRASCIENCE, INC.
FORM 10-QSB
MARCH 31, 1999
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
CERTAIN STATEMENTS IN THIS FORM 10-QSB CONSTITUTE "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 SIMILAR
EXPRESSIONS OR THE NEGATIVES THEREOF IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL, CURRENTLY
ANTICIPATED OR PROJECTED RESULTS. WE CAUTION YOU 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, 1999, 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" or "we") 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, 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999. 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, 1998.
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 was effective for the
fiscal year ending December 31, 1998. For the quarter ended March 31, 1999,
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. 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.
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<PAGE>
SPECTRASCIENCE, Inc. was incorporated in the state of Minnesota on May
4, 1983 as GV Medical, Inc., and is located at 3650 Annapolis Lane, Suite 101,
Minneapolis, Minnesota 55447-5434. Our telephone number is (612) 509-9999, and
our fax number is (612) 509-9805. Our web-site can be accessed at
http://www.spectrascience.com, and our e-mail address is
[email protected]. The Company's common stock, par value $.25 per share
(the "Common Stock"), is traded on the Over-The-Counter Bulletin Board under the
symbol SPSI.
(b) RESULTS OF OPERATIONS
The Company recorded no revenue for the three months ended March 31,
1999 and March 31, 1998. As a result, the Company had no the cost of products
sold or gross profit for the same periods.
Research and development expenses for the three months ended March 31,
1999 were $282,024, compared to $337,929 for the same period in 1998. The
decrease of 16.5% was primarily due to lower consulting, salary and design
engineering expenses. Design engineering expenses were less because most of the
costs associated with the design of our Optical BiopsyTM System were incurred in
late 1997 and throughout 1998.
Selling, general and administrative expenses for the three months ended
March 31, 1999 were $193,507, compared to $219,140 for the same period in 1998.
The decrease of 11.7% was primarly due to lower salary expenses and investor
relations expenses. This was partially offset by increases in consulting and
shareholder expenses, professional service expenses related to our attempt to
maintain our NASDAQ SmallCap Market listing, and fund-raising efforts such as
the private placement of the Company's Common Stock which closed in the first
quarter of 1999.
Interest and other income for the three months ended March 31, 1999 was
$15,238, compared to $19,210 for the same period in 1998. The decrease of 20.7%
was due to lower balances in cash and cash equivalents.
As a result of the above factors, the net loss for the three months
ended March 31, 1999 was $460,293, compared to a net loss of $537,859 for the
same period in 1998. This represents a decrease of 14.4% from the same period in
1998. The net loss per share for the three months ended March 31, 1999 was $.09
compared to $.12 for the same period in 1998.
(c) LIQUIDITY AND SOURCES OF CAPITAL
Cash and cash equivalents on March 31, 1999 were $1,976,112, compared
to $301,970 on December 31, 1998. The increase in our cash position from
December 31, 1998 to March 31, 1999 was primarily the result of warrants being
exercised and a private placement of the Company's Common Stock.
The working capital of the Company on March 31, 1999 was $1,693,466,
compared to ($27,791) on December 31, 1998. This increase of 61.9% was primarily
due to an increase in cash and cash equivalents as a result of warrant exercises
and a private placement of Common Stock.
Net cash used in operating activities for the three months ended March
31, 1999 was $493,264, compared to $850,140 for the same period in 1998. This
decrease of 41.9% was primarily due to a lower
Page 7
<PAGE>
net loss for the reasons stated above, a lower increase in inventory, and a
lower decrease in current liabilities in 1999 compared to 1998.
Net cash used in investing activities for the three months ended March
31, 1999 was $12,408, compared to net cash used of $6,373 for the same period in
1998. This increase was due to the purchase of additional capital equipment.
Net cash provided by financing activities for the three months ended
March 31, 1999 was $2,179,814, compared to $575,561 for the same period in 1998.
The additional cash provided for the quarter ended March 31, 1999 was the result
of (a) warrant exercises for 87,668 shares of the Common Stock at $6.00 per
share; (b) warrant exercises for 174,998 shares of the Common Stock at $3.00 per
share by shareholders who invested in the Company's issuance of Series A
Convertible Preferred Stock in June 1995; (c) a stock option exercise for 2,500
shares of the Common Stock at $4.7625 per share; and (d) a private placement of
293,750 shares of the Company's Common Stock at $4.00 per share. See Part II -
Item 5 for additional information relating to these financing activities.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about September 4, 1998, we were served with a Complaint in the
case of Paul Gibson v. SpectraScience, Inc. (Minn. 4th Jud. Dist.), claiming
that the plaintiff, who was at one time a financial consultant to the Company,
was entitled to receive options for 50,000 shares of our Common Stock at an
exercise price of $2.50 per share. Mr. Gibson 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 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
OPTION AND WARRANT EXERCISES
In January 1999, the Company received net proceeds of $485,407 from the
exercise of warrants to purchase 87,668 shares of Common Stock at $6.00 per
share. The warrants were held by shareholders who invested in the Company's
issuance of Series B Convertible Preferred Stock in December 1995. These
warrants were scheduled to expire in December 1998, but the Company extended the
expiration date of these warrants until January 26, 1999, and reduced the
exercise price from $9.00 per share to $6.00 per share. As an inducement for
warrant holders to exercise these amended warrants, the Company also granted
conditional warrants which entitled all warrant holders who exercised their
amended warrants prior to their expiration on January 26, 1999 to receive and
equivalent number of new warrants
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at an exercise price of $6.00 per share and an expiration date of December 28,
1999. A total of 87,668 amended warrants were exercised, and the remaining
warrants expired unexercised. If all of the contingent warrants that were issued
are exercised, it would raise an additional $526,008 for the Company.
In February 1999, an option holder exercised an option to purchase
2,500 shares of Common Stock at $4.7625 per share. This resulted in net proceeds
to the Company of $11,906.
In March 1999, various warrant holders exercised their warrants to
purchase 174,998 shares of Common Stock at $3.00 per share. This resulted in net
proceeds to the Company of $525,000.
In March 1999, the Company received net proceeds of $1,157,500 from a
private placement to accredited investors of 293,750 shares of its Common Stock
at $4.00 per share, which includes 258,750 shares that were sold on March 12,
1999, and 35,000 shares that were sold on March 31, 1999. Investors in this
private placement also received a warrant to purchase one-half share of Common
Stock at $5.00 per share, for each share purchased in the private placement. The
warrants will expire in March 2000. If exercised, these warrants would raise an
additional $734,375 for the Company.
YEAR 2000 ISSUE
Many currently installed computer systems and software are coded to
accept only two-digit entries in the date code fields. These date code fields
will need to accept four-digit entries to distinguish 21st century dates from
20th century dates. This problem could result in system failures or
miscalculations causing disruptions of business operations. As a result, many
companies' computer systems and software will need to be upgraded or replaced in
order to comply with Year 2000 ("Y2K") requirements. The potential global impact
of the Y2K problem is not known, and if not corrected in a timely manner, could
affect the Company in particular and the U.S. and world economy generally.
Our product development process currently contains steps to include Y2K
compliance verification for all current and future products. Our existing
products are Y2K compliant. In addition, we are requesting assurances from our
major and sole or limited source suppliers that they are addressing the Y2K
issue. These actions are intended to help mitigate the possible external impact
of the Y2K problem. The Y2K efforts of third parties are not within our control;
however, their failure to resolve Y2K issues successfully could result in
business disruption and increased costs to the Company. At the present time, it
is not possible to determine whether any such events are likely to occur, or
quantify any potential negative impact they may have on our future results of
operations and financial condition.
We are currently analyzing internal and external Y2K issues. Our
internal and other computer systems are being reviewed to assess and minimize
Y2K issues; this assessment includes our information technology ("IT") and
non-IT systems. Our Y2K compliance program includes the following phases:
identifying systems that may need to be modified or replaced; carrying out
modifications to existing systems or converting to new systems; and conducting
validation testing of various systems and applications to determine their
readiness. All internal IT computer systems and software have been assessed and
appear to be Y2K compliant. Computer equipment that we purchased in 1997 for the
purpose of satisfying operational needs is Y2K compliant, and final testing of
our accounting software will be completed during the second quarter of 1999. To
date, the assessment of our external IT systems has not revealed any Y2K
compliance issues. The assessment of our non-IT systems should be completed by
the third quarter of 1999. We estimate that we will complete our Y2K compliance
program for all of our significant internal systems by September 30, 1999.
We estimate the total cost for resolving our Y2K issues will probably
be less than $5,000, of which approximately $1,400 has been spent through May
14, 1999. The estimate of Y2K costs is based on numerous assumptions, and there
can be no assurance that the estimate is correct or that actual costs will not
be materially greater than anticipated.
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Although we use computer software and hardware for various operations,
including financial reporting, certain manufacturing and assembly functions, and
in our products, we believe that the Y2K issue will not cause any material
disruptions to our operations. However, if certain critical third-party
providers, such as those that supply electricity, water or telephone service,
experience difficulties resulting in disruption of the services they provide us,
a shutdown of our facility could occur for the duration of the disruption. We
plan to continuously monitor the status of completion of our Y2K plan and, based
upon such information, will develop a contingency plan as necessary.
The most reasonably likely worst-case scenario of failure by the
Company or our suppliers or customers to resolve Y2K issues could potentially be
a temporary slowdown or cessation of operations at our facility, and/or a
temporary inability on our part to timely process orders and to deliver finished
products to customers. Unresolved Y2K issues by the Company, suppliers or
customers could potentially delay the timing of payments from or to the Company.
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.
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SPECTRASCIENCE, INC.
FORM 10-QSB
MARCH 31, 1999
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 17, 1999 /S/ CHESTER E. SIEVERT, JR.
- -------------------- ---------------------------
Date CHESTER E. SIEVERT, JR.
President and Chief Executive Officer
(Principal Executive Officer)
Page 11
EXHIBIT 99
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, in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases and in any
other written or oral statements made by the Company, 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. These risks and uncertainties
include, but are not limited to, the factors listed under the caption "Risk
Factors" below. 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. New factors may emerge from
time to time, and it is not possible for the Company to predict all of such
factors, nor can the Company assess the impact of each factor on the business or
the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements. 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
LIMITED OPERATING HISTORY; SIGNIFICANT AND CONTINUING LOSSES
We have generated minimal revenues to date, no revenues on the
Optical BiopsyTM System (the "OBS"), and have sustained significant operating
losses each year since our inception. To date, our efforts have been directed
primarily toward researching, developing, testing and obtaining regulatory
clearances for our products. Our net losses for the years ended December 31,
1997 and 1998 were approximately $1.64 million and $2.41 million, respectively.
We had an accumulated deficit of approximately $46.5 million as of December 31,
1998. Of this amount, approximately $11.9 million has been incurred since
October 1992 when we began development of our current products and changed our
name. Our ability to achieve profitable operations will be largely dependent on
obtaining regulatory approval and reimbursement codes for, and successfully
commercializing, the OBS and other future products. We expect further operating
losses at least through the end of calendar year 2000 as we conduct
outcome-based clinical trials, expand research and development activities,
establish production level manufacturing capabilities and develop sales and
marketing activities. We can provide no assurance that we will be able to
successfully commercialize any of our potential products, achieve significant
revenues or achieve or sustain profitability.
-1-
<PAGE>
UNCERTAINTY OF HEALTH CARE REIMBURSEMENT
The Company plans to market and sell the OBS and other products
primarily through hospitals and clinics. In the United States, the purchasers of
medical devices generally rely on Medicare, Medicaid, private health insurance
plans, health maintenance organizations and other sources of third party
reimbursement for health care costs to reimburse all or part of the cost of the
procedure in which the medical device is used. Sales of the OBS and other
proposed products will be substantially dependent on the availability of
adequate reimbursement from third-party payors of procedures carried out through
use of the Company's products.
The OBS is not currently approved for reimbursement by third party
payors, and there can be no assurance that the OBS will be approved for any
third party reimbursement, even if it proves to play a significant role in the
early detection and subsequent treatment of colorectal cancer. Third-party
payors are increasingly challenging the pricing of medical products and
procedures. Even if a procedure is eligible for reimbursement, the level of
reimbursement may not be adequate. Additionally, payors may deny reimbursement
if they determine that the device used in a treatment was unnecessary,
inappropriate or not cost-effective, experimental or used for a non-approved
indication. Any failure to obtain third-party reimbursement for diagnostic
procedures using the Company's products or treatment procedures that rely on the
Company's products could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company is unable to predict what additional legislation or
regulation, if any, relating to the health care industry or third-party coverage
and reimbursement may be enacted in the future, or what effect such legislation
or regulation would have on the Company. Reforms may include mandated basic
health care benefits, controls on health care spending through limitations on
the growth of private health insurance premiums and Medicare and Medicaid
spending, greater reliance on prospective payment systems, the creation of large
insurance purchasing groups and fundamental changes to the health care delivery
system. The Company anticipates that Congress and state legislatures will
continue to review and assess alternative health care delivery systems and
payment mechanisms. Due to uncertainties regarding the ultimate features of
reform initiatives and their enactment and implementation, the Company cannot
predict which, if any, of such reform proposals will be adopted, when such
proposals may be adopted or what impact they may have on the Company.
NO ASSURANCE OF TIMELY REGULATORY APPROVAL; GOVERNMENT REGULATION
Medical product design, manufacture, labeling, distribution and
marketing is subject to extensive and rigorous government regulation in the
United States and internationally. Obtaining the required regulatory approvals
can be a lengthy, expensive and uncertain process. The United States Food and
Drug Administration ("FDA") classifies medical devices into one of three
classes, Class I, Class II or Class III. The controls deemed necessary by the
FDA to ensure the safety and efficacy of the device determine how it is
classified. Class I devices are those devices for which the safety and efficacy
can reasonably be ensured through the use of general controls such as labeling,
adherence to the FDA's Quality System Regulations ("QSR") requirements and the
510(k) process of marketing pre-notification. Class II devices are those devices
for which the safety and efficacy can reasonably be ensured through
implementation of general and special controls, such as performance standards,
post-market surveillance, patient registries and FDA guidelines. Class III
devices are generally those devices that must receive Pre-Market Application
("PMA") approval to ensure their safety and efficacy. These devices are
generally life-sustaining, life-supporting or implantable devices. They also
include devices that are not substantially equivalent to a legally marketed
Class I or Class II device or to a Class III device first marketed prior to May
28, 1976 for which a PMA has not yet been requested by the FDA. The OBS is a
Class III device that requires PMA approval prior to commercialization.
-2-
<PAGE>
Securing FDA clearance requires the submission to the FDA of
extensive clinical data and supporting information. The process of obtaining FDA
clearance and other required regulatory approvals is lengthy, expensive,
uncertain and typically requires from 180 days to several years from the date of
PMA filing with the FDA, if pre-market approval is obtained at all. We can
provide no assurance that the FDA will approve our PMA application for the OBS,
that the FDA will not request additional data or otherwise require us to conduct
further clinical trials, which would cause us additional delay and expense.
Additionally, further clinical trials, if required by the FDA, may identify
significant technical or other obstacles to be overcome before necessary
regulatory approvals will be granted. Other risks attendant to 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. Even if such obstacles are identified and overcome, regulatory
approval for, and resulting commercialization of, the OBS may be delayed. If the
FDA requires further clinical trials and the OBS does not prove to be safe and
effective, or if we cannot obtain regulatory approval or successfully
commercialize the OBS, our business, financial condition and results of
operations will be materially adversely affected.
To obtain FDA clearance to market our products, we will be required
to adhere to the FDA's QSR requirements. Other countries have similar
regulations, such as ISO 9001 standards in the European Union, which include
testing, control, and documentation requirements. Federal and state agencies in
the United States, and comparable agencies in other countries, conduct
inspections to monitor compliance with QSR or ISO 9001 standards and other
applicable regulatory requirements. If we fail to comply with these standards or
other regulatory requirements, we may be required to take corrective actions,
such as modifying our manufacturing policies and procedures. In addition, we may
be required to cease all or part of our operations for some period of time until
we can demonstrate that appropriate steps have been taken to comply with QSR or
ISO 9001 regulations. We can provide no assurance that we will not experience
difficulties as we develop our manufacturing capabilities or that future audits
by regulatory authorities will find us to be in compliance with QSR or ISO 9001
standards. Failure to develop our manufacturing capabilities in compliance with
QSR or ISO 9001 standards would prohibit us from manufacturing and distributing
our products, which could have a material adverse effect on our business,
financial condition and results of operations.
Sales of medical devices outside the United States are subject to
regulatory requirements that vary from country to country with respect to the
time typically required for approval and the degree of investigation. The
European Union adopted a Medical Device Directive, which was implemented in all
countries of the European Union in July 1998. Under this directive, we are
required to obtain ISO 9001 certification or undergo type testing on our
products in order to affix the required CE mark to our products. Once affixed,
the CE mark, which is an international symbol of adherence to certain quality
assurance standards and compliance with applicable European medical device
directives, enables a product to be sold in member countries of the European
Union. We have registered with a notified body to begin the ISO 9001
certification process, and also plan to obtain CE mark registration for our
products. We can provide no assurance that we will be able to obtain regulatory
approvals in such countries on a timely basis or at all, or that we will not
incur significant costs in obtaining or maintaining non-U.S. regulatory
approvals. Delays in or failure to receive such approvals, failure to comply
with existing or future regulatory requirements or the loss of previously
obtained approvals would have a material adverse effect on our business,
financial condition and results of operation.
Regulatory approvals, even if granted, may impose significant
limitations on the indicated uses for which the product may be marketed. In
addition, the FDA and certain foreign regulatory authorities may impose numerous
other requirements with which medical device manufacturers must comply. Product
approvals could be withdrawn for failure to comply with regulatory standards or
the occurrence
-3-
<PAGE>
of unforeseen problems following the initial marketing. Failure to comply with
applicable regulatory requirements, including the marketing of products for
unapproved uses, could result in actions such as fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, refusal by a government to grant pre-market approval for devices,
withdrawal of approvals and criminal prosecution. Any such failure to receive
regulatory approval for the OBS or any other products we may develop would have
a material adverse effect on our business, financial condition and results of
operations.
DEPENDENCE ON PRINCIPAL PRODUCT
We have not yet commercialized any of our products, and anticipate
that for the foreseeable future we will be solely dependent on the successful
development and commercialization of the OBS. The OBS will require additional
regulatory approvals before it can be marketed internationally. Although we
currently expect to receive PMA approval from the FDA in the first half of 1999
and expect to begin commercializing the OBS shortly thereafter, there can be no
assurance that our development efforts will be successful or that the OBS will
be proven to be safe or effective, approved by regulatory authorities, eligible
for reimbursement codes, capable of being manufactured in commercial quantities
at acceptable costs or successfully marketed. In addition, there can be no
assurance that demand for the OBS will be sufficient to allow profitable
operations. Even though we are in the process of developing new products in
addition to the OBS, there can be no assurance that such development efforts
will be successful or that any resulting products will achieve market
commercialization. Failure of the OBS to be successfully commercialized would
have a material adverse effect on our business, financial condition and results
of operations.
NEED FOR ADDITIONAL CAPITAL; UNCERTAINTY OF ADDITIONAL FINANCING
The development of future products will require us to commit
substantial funds to conduct research and development, establish commercial
scale manufacturing capabilities, and develop sales and marketing capabilities
to market the products. Our future capital requirements will depend on many
factors, including the progress and timing of our research and development, the
scope, design and results of our clinical trials, the time and expense required
to obtain regulatory approvals, the rate of technological advances, the
determination of the commercial potential of our products (which may be
dependent upon receiving reimbursement codes), the status of competitive
products and our ability to establish manufacturing capacity. We anticipate that
our current funds will be adequate to satisfy capital requirements at least
through fiscal year 1999 but that we will need to raise substantial additional
funds to commercialize the OBS and develop future products. These funds may be
raised through additional public or private offerings, strategic partnerships or
other means. We can provide no assurance that additional financing will be
available, or that it will be available on terms favorable to the Company or its
shareholders. If we are not able to obtain additional financing when needed, we
may have to significantly curtail our operations or obtain financing through
strategic partners on terms that might require us to relinquish significant
rights to our technology or potential markets.
LIMITED MANUFACTURING AND MARKETING EXPERIENCE FOR PRODUCTS; UNCERTAINTY OF
MARKET ACCEPTANCE
There have been no sales to date, and we anticipate that revenues
from sales of our products will not be significant for at least another year.
For the Company to be financially successful, we must manufacture our products
in accordance with regulatory requirements and in commercial quantities. We must
do this while maintaining appropriate quality levels and acceptable costs. We
have no experience manufacturing our products in the volumes that will be
necessary for us to achieve significant
-4-
<PAGE>
commercial sales, and there can be no assurance that reliable, high-volume
manufacturing capacity can be established or maintained at commercially
reasonable costs. If we receive FDA or foreign approval for the OBS or any other
products, we will need to expend capital resources and develop the necessary
expertise to establish production level manufacturing capabilities.
Manufacturers often encounter difficulties in scaling up production of new
products, including problems involving production yields, quality control,
component supply shortages, lack of qualified personnel, compliance with
applicable regulations, and regulatory approval of new manufacturing processes.
We believe that our current facility will be adequate to support our commercial
assembly and manufacturing activities in the near term but that additional space
may be required within the next two years in order to commercialize the OBS.
Even if we are able to manufacture the OBS in commercial quantities,
there can be no assurance that our products will be acceptable to the market.
There are many reasons potential products that appear promising are not
successfully commercialized. Newly developed products may not receive regulatory
approval or be successfully introduced and marketed at prices that would permit
profitable operations. Failure of any of our products to achieve market
acceptance could have a material adverse effect on our business, financial
condition or results of operations.
We intend to market and sell some of our products directly, while
relying on sales and marketing expertise of corporate partners for other
products. However, because we have limited experience in direct marketing of our
products, we can provide no assurance that such direct marketing will be
successful.
LACK OF SALES AND MARKETING EXPERIENCE; RELIANCE ON DISTRIBUTORS AND CORPORATE
PARTNERS
At present, the Company has limited marketing and sales capability.
Although we intend to establish an in-house sales, marketing and business
development group to assist in the commercialization of our products worldwide
and to provide clinical education to physicians, nurses and laboratory
technicians, our future success may depend, in part, on our ability to enter
into and successfully develop strategic partnerships and relationships with
distributors to market and distribute our products. We intend to sell our
products in the United States and outside the United States through strategic
partners and international distributors, and are currently seeking to enter into
relationships with such strategic partners and international distributors.
Although we have participated in preliminary discussions with certain potential
strategic partners and international distributors, we have not yet entered into
any definitive agreements with such potential strategic partners and
distributors. The prospects for relationships with strategic partners and
distributors will depend on the other parties' interests in the specific
products involved and their willingness and ability to perform in the role we
contemplate. We may have limited or no control over the resources that any
particular strategic partner or distributor devotes to its relationship with us.
Moreover, there can be no assurance that we will be successful in locating
qualified parties with which to enter into strategic partner or distributor
relationships or that any such relationships can be maintained or will
ultimately prove beneficial to us. In the event we are not successful in
developing such relationships, or if such relationships do not prove successful,
our business, financial condition and results of operations could be materially
adversely affected.
UNCERTAIN ABILITY TO MANAGE GROWTH
In order to complete clinical trials in progress, prepare additional
products for clinical trials, and develop future products, we believe we will be
required to expand our operations, particularly in the areas of research and
development, manufacturing, quality assurance and sales and marketing. We expect
to finance the expansion of operations and any necessary improvements of our
information
-5-
<PAGE>
systems through a combination of sales of the OBS and equity contributions by
potential distributors and corporate partners. Whether we can successfully
manage the transition to a larger-scale commercial enterprise will depend upon a
number of factors, including our ability to obtain additional regulatory
approvals and increase our commercial manufacturing, sales and marketing
capabilities, as well as our ability to establish relationships with
distributors in the United States and internationally. Our inability to
establish such capabilities and relationships would have a material adverse
effect on our business, financial condition and results of operations.
As we expand our operations, such expansion will likely result in
new and increased responsibilities for management personnel. To accommodate any
such growth and compete effectively, we will be required to implement and
improve our information systems, procedures and controls, and to expand, train,
motivate and manage our work force. We can provide no assurance that our
personnel, systems, procedures and controls will be adequate to support our
future operations or that our capabilities, procedures or controls will be
designed, implemented or improved in a timely and cost-effective manner. Any
failure to implement and improve our operational, financial and management
systems or to expand, train, motivate or manage employees as required by future
growth, if any, would have a material adverse effect on our business, financial
condition and results of operations.
DEPENDENCE ON PATENTS, PROPRIETARY RIGHTS AND LICENSES
Our success depends and will continue to depend in part on our
ability to maintain patent protection for our products and processes, to
preserve our trade secrets and to operate without infringing upon the
proprietary rights of third parties. Although we have filed or been awarded a
number of patents that we hope to exploit commercially, we can provide 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. We also rely upon proprietary technology that is not
patented. We can provide no assurance that we will be able to protect our rights
to such unpatented proprietary technology or that others will not duplicate or
independently develop substantially equivalent technology.
We may be required to obtain licenses to patents or other
proprietary rights of third parties in order to manufacture and market certain
products. We can provide no assurance that we will be able to license such
technology at a reasonable cost, if at all. If we do not obtain such licenses,
we could face delays in introducing such products while we attempt to design
around such patents. We can provide no assurance that we would be able to design
around such patents or, even if successful, we could find that the development,
manufacture or sale of such products could be adversely affected.
In addition, we could incur substantial costs in defending suits
brought against us on such patents or in suits in which we may assert our patent
rights 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 us, to protect trade
secrets or know-how that we own, to defend ourselves against claimed
infringement of the rights of others or to determine the ownership, scope or
validity of our proprietary rights and those of others. An adverse determination
in any such litigation could subject us to significant liabilities to third
parties, could require us to seek licenses from third parties and could prevent
us from manufacturing, selling or using our products, any of which could have a
material adverse effect on our business, financial condition and results of
operations.
We are a party to certain license agreements that grant significant
proprietary rights and which can be terminated by the licensor in the event of
certain material breaches on our part. If in the future, any of these agreements
were terminated we could lose the right to continue to develop and market one or
more products. We can provide no assurance that defaults will not occur in the
future.
-6-
<PAGE>
VOLATILITY OF STOCK PRICE; ADVERSE EFFECT OF SALES ON MARKET PRICE AND DILUTION
Historically, the market price for securities of companies with high
technology medical products has been highly volatile. From time to time the
securities of some companies experience significant price and volume
fluctuations that are unrelated to the operating performance of the company.
There are many factors that may have a material adverse effect on the market
price of our Common Stock. These factors could be events such as announcements
of technological innovations or new diagnostic or therapeutic products, changes
in government regulations, public concern as to product safety, fluctuations in
operating results, developments in patent or other proprietary rights and
general market conditions. In addition, future sales of common stock by existing
shareholders and holders of options and warrants could adversely affect the
prevailing market price of the Company's Common Stock.
LIQUIDITY OF COMMON STOCK; TRADING ON OTC BULLETIN BOARD
The Company's Common Stock is currently traded on the OTC Bulletin
Board under the symbol SPSI. The OTC Bulletin Board is a less orderly market
than the Nasdaq SmallCap Market on which the Company's Common Stock formerly
traded. Although the Company anticipates re-listing its shares on Nasdaq after
obtaining FDA clearance for, and beginning commercialization of, the OBS, there
can be no assurance that the Company will be able to re-list its Common Stock on
Nasdaq. As a result, an investor may find it more difficult to dispose of or to
obtain accurate quotations as to the market value of the Company's Common Stock.
In addition, the Company is subject to a rule promulgated by the Securities and
Exchange Commission that, if the Company fails to meet criteria set forth in
such rule, imposes various sales practice requirements on broker-dealers who
sell securities governed by the rule to persons other than established customers
and accredited investors. For these types of transactions, the broker-dealer
must make a special suitability determination for the purchaser and must have
received the purchaser's written consent to the transactions prior to sale.
Consequently, the rule may have an adverse effect on the ability of
broker-dealers to sell the Company's securities, which may affect the ability of
purchasers of the Company's Common Stock to sell the Common Stock in the
secondary market.
DEPENDENCE ON KEY PERSONNEL
Our success is highly dependent on our ability to retain principal
members of our management and scientific staff, including Chester E. Sievert,
Jr., the Company President and Chief Executive Officer, and to recruit
additional qualified personnel. There is intense competition for qualified
personnel from other companies, organizations, and research and academic
institutions. We can provide no assurance that we 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 an adverse effect on our business,
financial condition and results of operations.
DEPENDENCE ON CONSULTANTS AND CONTRACT MANUFACTURERS
We are a party to key consulting arrangements with a number of
individuals and business organizations. These arrangements provide us with
services in the area of regulatory compliance and submissions, management, and
software development. Risks attendant to the use of consultants include our
ability to hire competent consultants and the availability of such consultants
on short notice. We also rely on contract manufacturers. Contract manufacturers
we use will be subject to audit by the 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 potential difficulties
in maintaining proprietary information, potential inability to obtain products
on a timely basis, and a lack of control over costs, inventory and the
manufacturing process.
-7-
<PAGE>
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 our products may expose
us 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. We currently maintain $2 million of product liability insurance
coverage. We can provide no assurance that we will be able to maintain such
insurance at a reasonable cost or at all. If we are not able to maintain
insurance at acceptable costs or at all, it could adversely affect the clinical
testing or commercialization of our products. The Company will also be likely to
require additional product liability insurance as it begins to commercialize its
products. In addition, there can be no assurance, regardless of the availability
of product liability insurance, that we will be adequately protected from claims
that may be brought against us. A product liability claim or recall could have a
material adverse effect on our business, financial condition and results of
operations.
DEPENDENCE ON SOLE OR LIMITED SOURCES OF SUPPLY
Currently, we purchase raw materials and certain key components of
our products, including the Forceps and certain components of the OBS Console,
from sole, single or limited sources of supply. For certain of these components,
there are relatively few alternative sources of supply. We currently have an
agreement with a leading manufacturer of medical forceps in the United States.
Under this agreement, the contract manufacturer has agreed to supply us with
such quantity of OBS Forceps as we require. This agreement expires in June 2000
but may be renewed by the contract manufacturer for an additional two years upon
six months' notice. We can provide no assurance that such agreement will be
renewed. Furthermore, establishing additional or replacement suppliers for the
OBS Forceps or for the laser light source and spectrophotometer used in the OBS
Console may not be accomplished quickly and could involve significant additional
costs. The inability of any of our suppliers to provide an adequate supply of
components in a timely manner, or our inability to locate qualified alternative
suppliers for materials and components at a reasonable cost, could adversely
affect our business, financial condition and results of operations. Any delays
or shortages, particularly as we scale up our manufacturing activities in
support of sales, could have a material adverse effect on our business,
financial condition and results of operations.
HIGHLY COMPETITIVE INDUSTRY
The medical device industry is highly competitive. Although we are
not aware of any direct competitors using an endoscopic optical biopsy system to
detect and differentiate between healthy and cancerous tissues in the
gastrointestinal tract, there can be no assurance that we will be the first to
market such a system or to market such a system effectively. Many of our
competitors and potential competitors have substantially greater capital
resources than us and also have greater resources and expertise in the areas of
research and development, obtaining regulatory approvals, and manufacturing and
marketing products. We can provide no assurance that our competitors and
potential competitors will not succeed in developing, marketing and distributing
technologies and products that are more effective than those developed and
marketed by us or that would render our technology and products obsolete or
non-competitive. In addition, we can provide no assurance that we will be able
to compete effectively against such competitors and potential competitors in
terms of manufacturing, marketing and sales.
NEED FOR CONTINUOUS PRODUCT DEVELOPMENT; RISK OF RAPID TECHNOLOGICAL CHANGE
The medical device industry is characterized by rapid innovation and
technological change. Any product we develop that gains regulatory clearance or
approval will have to compete for market
-8-
<PAGE>
acceptance and market share. Since the medical device industry is subject to
rapid technological innovation, the life cycle of any particular product is
short and, as a result, an important factor in such competition may be the
timing of market introduction of competitive products. Accordingly, the relative
speed with which we can develop products, gain regulatory approval and
reimbursement acceptance and supply commercial quantities of the product to the
market are expected to be important competitive factors. We can provide no
assurance that alternative diagnostic systems or other discoveries and
developments with respect to diagnosis and treatment of cancer and other human
diseases will not render our products obsolete.
YEAR 2000 MATTERS
Many currently installed computer systems and software are coded to
accept only two digit entries in the date code fields. These date code fields
will need to accept four-digit entries to distinguish 21st century dates from
20th century dates. This problem could result in system failures or
miscalculations, which could cause disruptions of business operations (including
a temporary inability to process transactions, send invoices or engage in other
business activities). As a result, many companies' computer systems and software
will need to be upgraded or replaced in order to comply with Year 2000
requirements. The potential global impact of the Year 2000 problem is not known,
and, if not corrected in a timely manner, could affect the Company and the U.S.
and world economy generally. We are currently taking steps to ensure Year 2000
compliance for our products and systems as well as those of important customers
and suppliers. We believe that most of our products and systems are currently
Year 2000 ready. Although we can provide no assurance, we believe that readiness
for all of our products and systems that are not Year 2000 compliant will be
achieved prior to January 1, 2000.
-9-
<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, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,976,112
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 193,197
<CURRENT-ASSETS> 2,240,945
<PP&E> 819,877
<DEPRECIATION> 574,082
<TOTAL-ASSETS> 2,486,740
<CURRENT-LIABILITIES> 547,479
<BONDS> 0
<COMMON> 1,324,180
0
0
<OTHER-SE> 1,939,261
<TOTAL-LIABILITY-AND-EQUITY> 2,486,740
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 475,531
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (15,238)
<INCOME-PRETAX> (460,293)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (460,293)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> 0
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