As filed with the Securities and Exchange Commission on July 7, 2000
Registration No.
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SPECTRASCIENCE, INC.
(Name of small business issuer in its charter)
MINNESOTA 3845 41-1448837
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
Number)
14405 21ST AVENUE N, SUITE 111
MINNEAPOLIS, MINNESOTA 55447
(763) 745-4120
(Address and telephone number of principal executive offices)
CHESTER E. SIEVERT, JR.
SPECTRASCIENCE, INC.
14405 21ST AVENUE N, SUITE 111
MINNEAPOLIS, MINNESOTA 55447
(763) 745-4120
(Name, address and telephone number of agent for service)
COPIES TO:
DAVID E. DRYER, ESQ.
CHAPPELL WHITE LLP
268 SUMMER STREET
BOSTON, MASSACHUSETTS 02210
(617) 279-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Title of each Proposed maximum Proposed maximum Amount of
class of securities Amount to be offering price aggregate registration
to be registered registered per share(1) offering price(1) fee
<S> <C> <C> <C> <C>
Common Stock, $.25 par value .......... 139,250 shares $6.125 $852,906.25 $225.17
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</TABLE>
(1) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457(c) on the basis of the average of the last reported
bid and asked prices of the common stock in the over-the-counter market, as
reported by the National Quotation Bureau, on, July 6, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
SUBJECT TO COMPLETION, DATED JULY 7, 2000
<PAGE>
PROSPECTUS
SPECTRASCIENCE, INC.
Common Stock
139,250 Shares
This prospectus covers the registration of shares of common stock of
SPECTRASCIENCE, Inc. for sale by selling shareholders as follows:
* 89,250 shares of common stock issuable upon the exercise of
outstanding warrants; and
* 50,000 shares of common stock issuable upon the exercise of stock
options, pursuant to an order for judgement filed in the Fourth
Judicial District Court, Minneapolis, Minnesota.
The selling shareholders may sell shares either directly to purchasers
or through brokers, dealers or agents. We will receive no proceeds from the sale
of shares by the selling shareholders, but could receive up to $551,250 if all
the warrants and stock options were exercised.
Shares of our common stock are traded in the over-the-counter market
under the symbol "SPSI." On July 6, 2000, the average of the last reported bid
and asked prices of our common stock in the over-the-counter market, as quoted
by the National Quotation Bureau, was $6.125 per share.
Investment in our common stock involves substantial risks, and
investors should not invest any funds in this offering unless they can afford to
lose their entire investment. SEE "RISK FACTORS" BEGINNING ON PAGE 7. In making
an investment decision investors must rely on their own examination of the
issuer and the terms of the offering, including the merits and risks involved.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The information in this prospectus is not complete and may be changed.
Our selling shareholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities, and it is not a
solicitation for an offer to buy these securities in any state where the offer
or sale of these securities is not permitted.
The date of this prospectus is July 7, 2000
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_________________
TABLE OF CONTENTS
_________________
PAGE
NO.
---
PROSPECTUS SUMMARY............................................................4
SUMMARY FINANCIAL DATA........................................................6
RISK FACTORS..................................................................7
USE OF PROCEEDS..............................................................13
CAPITALIZATION...............................................................13
SELLING SECURITY HOLDERS.....................................................14
PLAN OF DISTRIBUTION.........................................................15
LEGAL PROCEEDINGS............................................................15
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES..............................16
EXECUTIVE COMPENSATION.......................................................18
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............21
CERTAIN TRANSACTIONS.........................................................22
DESCRIPTION OF BUSINESS......................................................23
MANAGEMENT'S DISCUSSION AND ANALYSIS.........................................37
PROPERTY.....................................................................40
PRICE RANGE OF COMMON STOCK..................................................40
DIVIDEND POLICY..............................................................41
DESCRIPTION OF SECURITIES....................................................41
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITITES ACT LIABILITIES..............................................43
LEGAL MATTERS................................................................43
EXPERTS......................................................................44
ADDITIONAL INFORMATION.......................................................44
INFORMATION NOT REQUIRED IN PROSPECTUS.......................................46
AUDITED FINANCIAL STATMENTS AND FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 2000...........................................F
-------------------
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PROSPECTUS SUMMARY
THE FOLLOWING IS ONLY A SUMMARY. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. YOU SHOULD READ
THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE RISKS OF INVESTING IN OUR COMMON
STOCK DISCUSSED UNDER "RISK FACTORS." OUR ACTUAL RESULTS MAY DIFFER GREATLY FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
SPECTRASCIENCE, Inc. designs, develops, manufactures and plans to
market, innovative Laser Induced Fluorescence spectrophotometric systems. We
believe that our principal product, the Virtual Biopsy(TM) System, will enable
us to be the first to market an optical biopsy system that aids in the
differentiation between healthy and pre-cancerous or cancerous tissues. In
addition, we believe the technology is a platform that can also be used to
detect other cancers found in the body.
This prospectus covers the registration of 139,250 shares of common
stock issuable upon the exercise of options or warrants to acquire our common
stock.
We conducted multi-center clinical trials using the Virtual Biopsy(TM)
System as an aid in the detection of colorectal cancer. Based upon the clinical
trial results, we believe the SPECTRASCIENCE Virtual Biopsy(TM) System aids and
improves the physician's accuracy in determining whether tissue is normal, as
opposed to pre-cancerous or cancerous. The benefits of increased accuracy
should:
* enable the physician to immediately determine the best course of
treatment for the patient;
* reduce the need for additional procedures;
* minimize the number of biopsies taken; and
* permit the physician to combine a diagnostic and therapeutic
procedure in one visit.
We believe that the Virtual Biopsy(TM) System will facilitate earlier
detection of cancer. Early detection increases the patient's chances for
long-term survival. Earlier detection should lead to:
* earlier, more effective treatment;
* improved patient survival rates; and
* reduced patient care costs.
The data from the above-mentioned clinical trials was used to support
our pre-market approval application for the Virtual Biopsy(TM) System. On
November 19, 1999 an FDA Medical Device Panel recommended our application for
approval. The recommendation included a post-approval clinical study. As of the
date of this prospectus, management has responded to a request from the FDA
received in February 2000 regarding labeling and further data analysis. At
present, the FDA must still render a final approval and clearance to market
before the Virtual Biopsy(TM) System can be sold in the United States.
As of the date of this prospectus SPECTRASCIENCE successfully completed
a final audit necessary to receive ISO 9001 Certification. A CE Mark application
will be filed shortly following ISO Certification. Both ISO 9001 Certification
and CE Mark authorization are necessary to make sales in Europe. We expect to
have secured the necessary approvals to make sales in the United States and
Europe in the year 2000.
SPECTRASCIENCE wants to become a leader in developing and
commercializing advanced, spectrophotometric diagnostic products that
differentiate, in real time, between healthy and pre-cancerous or cancerous
tissues. We intend to accomplish this with the following strategy:
* commercialize the Virtual Biopsy(TM)System by becoming the first to
market an endoscopic optical biopsy system for colorectal
applications;
* demonstrate to third party payors and managed care companies the
usefulness and effectiveness of our system by improving patient
outcomes;
* demonstrate to physicians how easy the Virtual Biopsy(TM) System is
to use;
* collaborate with strategic partners to market and distribute the
Virtual Biopsy(TM) System; and
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* use our core technologies and the Virtual Biopsy(TM) System platform
for the detection of cancers in other areas of the body.
Our net loss for the year ended December 31, 1999 was approximately
$2.2 million, and our net loss for the quarter ended March 31, 2000 was
$524,503. We expect operating losses to continue through at least the end of
calendar year 2000 as we bring the Virtual Biopsy(TM) System to market, expand
research and development activities, and expand sales and marketing activities.
SPECTRASCIENCE was incorporated in the State of Minnesota on May 4,
1983 as GV Medical, Inc. In October 1992, GV Medical discontinued its prior
business, refocused its development efforts and changed its name to
SPECTRASCIENCE, Inc. Our principal executive offices are located at 14405 21st
Avenue N, Suite 111, Minneapolis, Minnesota 55447. You can reach us by telephone
at (763) 745-4120; by fax at (763) 745-4126; or by email at
[email protected]. We have a web-site at http://www.spectrascience.com.
The information contained on our web site is not deemed to be a part of this
prospectus.
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SUMMARY FINANCIAL DATA
The following summary financial information should be read along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements, including the notes, included in this
prospectus. Ernst & Young LLP audited the financial statements upon which the
data marked as "audited" are based.
Year Ended Quarter Ended
December 31, March 31,
1999 2000
------------
(Audited) (Unaudited)
------------ ------------
STATEMENT OF OPERATIONS DATA:
Revenues ..................................... $ -- $ --
Costs and expenses:
Research and development ........ 1,356,986 334,573
General and administrative ...... 794,221 242,518
------------ ------------
Loss from operations ......................... (2,151,207) (577,091)
Interest and other (expense) income .......... (28,626) 52,588
------------ ------------
Net loss ..................................... (2,179,833) (524,503)
============ ============
Net loss per share (1) ....................... $ (0.41) $ (0.08)
============ ============
Shares used to compute net
loss per share (1) .............. 5,288,974 6,452,553
December 31, March 31,
1999 2000
(Audited) (Unaudited)
-----------
BALANCE SHEET DATA:
Working capital .............................. $ 3,518,136 $ 3,629,507
Total assets ................................. 4,928,104 5,041,579
Total liabilities ............................ 1,161,882 1,158,722
Accumulated deficit(2) ....................... (48,731,203) (49,255,707)
Total shareholders' equity ................... $ 3,766,222 $ 3,882,857
----------------------
(1) See Note 1 of Notes to the Financial Statements for an explanation of
the method used to determine the number of shares to compute net loss
per share.
(2) Includes an accumulated deficit of $34,638,007 incurred prior to
October 1, 1992. This is the quarter in which G.V. Medical started to
develop its current products and changed its name to "SPECTRASCIENCE,
Inc."
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RISK FACTORS
ALONG WITH THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE PURCHASING SHARES OF
COMMON STOCK OFFERED BY THIS PROSPECTUS. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. SEE
"--FORWARD-LOOKING STATEMENTS."
WE EXPECT TO CONTINUE TO INCUR OPERATING LOSSES. Our net loss for the
year ended December 31, 1999 was $2,179,833. The net loss for the quarter ended
March 31, 2000 was $524,503. Our accumulated deficit at December 31, 1999 was
approximately $48.7 million. Approximately $14.1 million of the deficit has been
incurred since October 1992 when our focus changed. We expect our operating
losses to continue through calendar year 2000. We must receive regulatory
approval for our Virtual Biopsy(TM) System and then successfully commercialize
it if we hope to achieve profitable operations in 2001. If we fail to obtain the
necessary regulatory approvals or are not successful in commercializing the
Virtual Biopsy(TM) System, we will continue to have operating losses until we
are able to commercialize a product.
IF ADEQUATE REIMBURSEMENT IS NOT AVAILABLE, SALES OF THE VIRTUAL
BIOPSY(TM) SYSTEM TO MANAGED CARE ORGANIZATIONS AND MEDICAL FACILITIES WILL BE
ADVERSELY AFFECTED. Managed care organizations and medical facilities will seek
reimbursement from various governmental programs and private insurance carriers
for charges associated with providing Virtual Biopsy(TM) System related
healthcare services. Procedures using the Virtual Biopsy(TM) System are not now,
and may not ever be approved for reimbursement by these government programs and
private insurance carriers. Even if the procedures become eligible, the level of
reimbursement may not be adequate. If we fail to obtain adequate third-party
reimbursement, it will negatively affect our business and ability to sell the
Virtual Biopsy(TM) System. See "Business--Third-Party Reimbursement."
EXTENSIVE GOVERNMENT REGULATION OF THE HEALTHCARE INDUSTRY COULD RESULT
IN INCREASED COST OF OPERATIONS, WHICH WOULD ADVERSELY AFFECT OUR BUSINESS. The
healthcare industry in general, and the medical device sector in particular, is
heavily regulated in the areas of licensing, operations, facilities,
environmental protection, and pricing and reimbursement policies. We believe we
are currently operating in compliance with applicable regulations. We also
believe that the healthcare industry is constantly changing and that we will
probably be required to modify our operations from time to time to stay in
compliance with the applicable regulations. We cannot predict the cost of
compliance with, or what effect new or additional legislation or regulation
would have on our products or business operations. Subsequent adoption of laws
or interpretations of existing laws could restrict or otherwise adversely affect
our business. See "Business--Government Regulation" and "Third-Party
Reimbursement."
FAILURE TO COMPLY WITH EXTENSIVE FEDERAL, STATE AND LOCAL REGULATIONS
COULD ADVERSELY AFFECT OUR BUSINESS. Many federal and state government agencies
extensively regulate the manufacture, packaging, labeling, advertising,
promotion, distribution and sale of our products. The broad language used in the
laws that regulate our business often makes it difficult for us to remain in
strict compliance. Our failure or inability to comply with applicable laws and
governmental regulations may materially and adversely affect our business. See
"Business--Government Regulation."
WE MAY NOT RECEIVE GOVERNMENTAL APPROVALS FOR OUR PROPOSED PRODUCTS ON
A TIMELY BASIS, OR AT ALL, WHICH WOULD PREVENT US FROM SUCCESSFULLY MARKETING
OUR PRODUCTS. The design, manufacture, labeling, distribution and marketing of
our products is subject to extensive government regulation in the United States
and internationally. The process of obtaining required regulatory approvals is
lengthy, expensive and uncertain.
In the United States, medical devices are assigned to one of three
classes depending on the controls the FDA deems necessary to ensure the safety
and effectiveness of the device. The Virtual Biopsy(TM) System is a Class III
device. In addition to adhering to general controls to which all medical devices
are subject, and special controls such as performance standards, post-market
surveillance and patient registries, a Class III device must receive
pre-marketing approval to ensure its safety and effectiveness. Our pre-market
approval application for the Virtual Biopsy(TM) System received a positive FDA
Medical Device Panel Review in November 1999. In February 2000, the FDA
requested that we address queries raised by their advisory panel and the Office
of Device Evaluation's reviewing staff regarding our application; in particular
the appropriate labeling of the Virtual Biopsy(TM) System. Although we have
submitted our response to these queries, a final approval is still necessary
before we can commercialize the Virtual Biopsy(TM) System in the United States.
We expect our application to receive FDA final approval in 2000 with a possible
requirement by the FDA that we conduct a post-approval clinical study. It is
however, still very possible that the FDA could request additional clinical data
or otherwise disapprove our application, requiring us to start over. This would
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delay us in commercializing our product. The delay and additional expense would
adversely affect our business and could materially affect our financial
condition. See "Business--Clinical Trials" and "--Government Regulation."
REGULATORY REQUIREMENTS COULD DELAY THE INTRODUCTION OF OUR PRODUCT
INTO FOREIGN MARKETS OR LIMIT OUR MARKETING SCOPE, BOTH OF WHICH WOULD ADVERSELY
AFFECT SALES. Sales of medical devices are subject to regulatory requirements
that vary from country to country. We may not be able to obtain necessary
foreign regulatory approvals. It may also be very costly to obtain or maintain
foreign regulatory approvals. Because of the nature of our product, we must
obtain ISO 9001 certification and receive CE mark authorization prior to selling
products in the European Union. SPECTRASCIENCE is currently in the process of
trying to achieve ISO 9001 certification and CE mark authorization. We may not
be able to achieve either on a timely basis or at all. If we do not get ISO 9001
certified, do not receive the CE mark, or do not obtain necessary foreign
regulatory approvals it may negatively affect our ability to market our product
in foreign markets and could adversely affect our business. See
"Business--Government Regulation."
THE VIRTUAL BIOPSY(TM) SYSTEM IS OUR ONLY FULLY DEVELOPED PRODUCT AND
OUR FUTURE IS HIGHLY DEPENDENT ON OUR ABILITY TO SUCCESSFULLY COMMERCIALIZE IT.
Even though we are developing new products in addition to the Virtual Biopsy(TM)
System, it is possible our efforts may not be successful or that we may not be
able to commercialize products we succeed in developing. In order to achieve
profitable operations in 2001, we must receive final FDA clearance to market and
successfully commercialize the Virtual Biopsy(TM) System in the near term. If we
do not receive final clearance or are unable to successfully commercialize our
only fully developed product, we may not be able to raise additional funds in
the future and it may have a material adverse effect on our financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business--The SPECTRASCIENCE
Solution," "--Sales and Marketing," "--Manufacturing" and "--Clinical Trials."
IF PHYSICIANS DO NOT ACCEPT THE USE OF OUR PRODUCT OUR ABILITY TO
COMMERCIALIZE IT WILL BE ADVERSELY AFFECTED. We believe that physician
acceptance of procedures performed using the Virtual Biopsy(TM) System will be
essential for its market acceptance. There can be no assurance that physicians,
medical providers or the medical community in general will accept and utilize
our product even though it may be safe and effective. Failure of any of our
products to achieve market acceptance could have a material adverse effect on
our business and financial condition. See "Business--The SPECTRASCIENCE
Solution," "--Sales and Marketing" and "--Clinical Trials."
WE MAY HAVE PROBLEMS MANAGING GROWTH AS WE EXPAND OUR OPERATIONS. As we
commercialize the Virtual Biopsy(TM) System and develop additional products, we
expect to expand operations in all areas. We will have to implement or improve
operational, financial and management systems, as well as expand and manage our
workforce. If we fail to manage the growth properly, our systems, personnel,
procedures or controls may not be designed, implemented or improved in a timely
and cost-effective manner. If our resources cannot support future operations,
growth may be limited and there may be a material adverse effect on our
business, financial condition and results of operations. See " "--Limited
Manufacturing Experience; Scale-Up Risk," "Business--Manufacturing,"
"--Dependence on Key Personnel" and "Business--Employees" and "Management."
OUR LIMITED SALES AND MARKETING RESOURCES COULD PREVENT US FROM
EFFECTIVELY MARKETING OUR PRODUCTS. We have very limited internal marketing and
sales resources and personnel. In order to market the Virtual Biopsy(TM) System
and any other products we may develop, we will have to develop distribution
capabilities and a marketing and sales force with technical expertise. We may
not be able to establish sales and distribution capabilities, obtain
distribution agreements on commercially reasonable terms, or gain market
acceptance for our products. We may also have difficulty in recruiting and
retaining skilled marketing and sales personnel. Our marketing and sales efforts
may not be successful. If we cannot effectively market our products it will have
a material adverse effect on our business. See "Business--Sales and Marketing."
WE MAY NOT BE ABLE TO ENTER INTO STRATEGIC PARTNERSHIPS AND
RELATIONSHIPS WITH DISTRIBUTORS TO MARKET AND DISTRIBUTE OUR PRODUCTS. We intend
to sell our products through strategic partners and distributors. Our future
success will depend, in part, on our ability to enter into agreements that will
be beneficial to us. The prospects for relationships with strategic partners and
distributors will depend on their interest in our product(s). It will also
depend on their ability and willingness to perform in the roles we contemplate
for them. We may have limited control or no control over the resources that any
particular strategic partner or distributor devotes to its relationship with us.
We may not be able to locate qualified parties with whom we can enter into
strategic partner or distributor relationships. If we are not successful in
developing these types of relationships, or if the relationships do not prove
successful, our business, financial condition and results of operations could be
materially adversely affected. See "Business--Sales and Marketing."
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SOME RAW MATERIALS AND KEY COMPONENTS OF OUR PRODUCTS ARE PURCHASED
FROM SOLE OR LIMITED SOURCES OF SUPPLY. For some of these raw materials and key
components, there are few alternative sources of supply. We may not be able to
renew the existing agreement under which we purchase our Optical Biopsy Forceps.
If we need to establish additional or replacement suppliers for the Forceps,
laser light source or spectrophotometer used in the Virtual Biopsy(TM) System,
it could be costly and time consuming. If any of our suppliers fail to provide
an adequate supply of components in a timely manner or if we cannot locate
qualified alternative suppliers for materials and components at reasonable
expense, it could adversely affect our business and financial condition. Any
delays or shortages could have a material adverse effect on our business and
financial condition, especially as we scale up our manufacturing activities in
support of sales. See "Business--Manufacturing."
WE HAVE NO EXPERIENCE IN MANUFACTURING OUR PRODUCTS IN COMMERCIAL
QUANTITIES. To be financially successful we must manufacture our product in
accordance with regulatory requirements, in commercial quantities, at
appropriate quality levels, and at acceptable costs. We may not be able to
establish or maintain reliable, high-volume manufacturing capacity at
commercially reasonable costs. If we receive FDA or foreign approval for our
products, we will need to expend significant capital resources and develop the
necessary expertise to establish large-scale 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 the need for further regulatory approval of new
manufacturing processes. We believe our current facility is adequate to support
our commercial assembly and manufacturing activities for the next several years.
If we are unable to establish and maintain large-scale manufacturing
capabilities, it could have a material adverse effect on our business and
financial condition. See "Business--Manufacturing."
THE MEDICAL DEVICE INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY NOT BE THE
"FIRST TO MARKET" OR BE ABLE TO COMPETE EFFECTIVELY. We are not aware of any
direct competitors using an endoscopic optical biopsy system to detect and
differentiate between healthy and pre-cancerous or cancerous tissues in the
gastrointestinal tract. However, there can be no assurance that we will be the
first to market such a system or to market such a system effectively. We believe
that our competitors are primarily development stage companies in the process of
developing spectroscopic technology for early cancer detection. However, many of
our competitors and potential competitors are larger and have greater financial,
personnel, manufacturing, distribution, marketing and other resources than we
do. Competition from these companies may materially and adversely affect our
business. See "Business--Competition."
OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WE FAIL TO DEVELOP NEW
PRODUCTS. Rapid innovation and technological change characterize the medical
device industry. Because of this, the life cycle of any particular product is
short. Therefore, the speed with which we can develop products, gain regulatory
approval and reimbursement acceptance and supply commercial quantities of the
product to the market are important competitive factors. New discoveries and
developments with respect to the diagnostic treatment of cancer, or alternative
diagnostic systems could render our products obsolete. See
"Business--Competition."
OUR PATENTS, COPYRIGHTS, TRADE SECRETS AND PROPRIETARY RIGHTS CONTRACTS
MAY NOT BE SUFFICIENT TO PROTECT OUR INTERESTS. Our success depends partly on
our ability to maintain patent protection for our products and processes, to
preserve our trade secrets and to operate without infringing on the proprietary
rights of third parties. The patent and trade secret positions of medical device
companies often involve complex and evolving legal and factual questions. The
laws of some foreign countries do not protect our intellectual property rights
to the same extent that the laws of the United States do. We have several
allowed and pending patents covering different aspects of the Virtual Biopsy(TM)
System. We can provide no assurances that any patent we apply for will be
issued. Furthermore, there are no assurances that any issued patents will not be
challenged, invalidated, or circumvented, or that the rights granted will
provide any competitive advantage. For the Virtual Biopsy(TM) System, we
currently own exclusive rights to a total of six issued, allowed and pending
U.S. patents and applications, and four pending international patent
applications. We are the exclusive licensee of one allowed U.S. application and
one other international patent application. See "Business--Patents and
Proprietary Rights."
We also rely on proprietary technology that is not patented. There can
be no assurances that others will not independently develop substantially
equivalent proprietary information and techniques, or gain access to or disclose
our proprietary technology. We may not be able to protect our rights in the
unpatented proprietary technology. SPECTRASCIENCE policy requires each employee,
consultant and advisor to execute a confidentiality agreement upon the
commencement of a business relationship with us. These agreements generally
provide that all inventions conceived by the individual during the term
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of the relationship are the exclusive property of SPECTRASCIENCE and shall be
kept confidential. There can be no assurance that these agreements will protect
our proprietary information in the event of unauthorized use or disclosure of
such information, or that if they do provide a meaningful level of protection,
that we will have the financial resources necessary to enforce our proprietary
rights. Any loss of patent protection or know-how for our products could
adversely affect our business. See "Business--Patents and Proprietary Rights."
THERE IS A HIGH RISK OF INTELLECTUAL PROPERTY LITIGATION WITHIN THE
MEDICAL DEVICE INDUSTRY. We could incur substantial expense in defending or
enforcing our intellectual property rights. In addition to being costly, the
litigation process is time consuming and would divert our limited resources.
There can be no assurances that we will have the financial or other resources
necessary to enforce our patent rights against our competitors, many of whom
have substantial resources. We could also incur substantial expense in defending
ourselves against third parties' infringement claims with respect to patent or
other intellectual property rights. There can be no assurances that we could
successfully defend ourselves against these claims. If unsuccessful, we may have
to modify our products, refrain from selling them, or enter into royalty
agreements that would allow us to continue selling them. It is common to settle
infringement claims through licensing or similar arrangements, but the
associated costs could be substantial and could include ongoing royalties. We
may not be able to obtain necessary licenses on satisfactory terms or at all. An
adverse determination in any intellectual property litigation could have a
material adverse effect on our business and financial condition.
WE HAVE A LICENSING AGREEMENT, WHICH IF TERMINATED WOULD ADVERSELY
AFFECT OUR BUSINESS. We currently have a licensing agreement with The
Massachusetts General Hospital giving us an exclusive license to certain
endoscopic accessories patents. The agreement provides that any patents licensed
under it are exclusive through the life of the licensed patents. The agreement
also requires us to use our commercially reasonable best efforts to introduce
products. Under this agreement we have an exclusive license to an issued patent
for the Virtual Biopsy(TM) System forceps and fiber. The license agreement is
subject to termination for failure to pay fees or other material breach.
We can provide no assurance that these license agreements will remain
in force or provide the proprietary rights that we require to develop and
commercialize our products. We could encounter significant delays in product
introduction if we had to design around the proprietary rights granted in these
licensing agreements, and we can provide no assurance that we would even be able
to design around them. Even if we were able to design around their proprietary
rights, doing so could adversely affect our business. See "Business--Patents and
Proprietary Rights."
OUR SUCCESS IS HIGHLY DEPENDENT ON THE RETENTION OF PRINCIPAL MEMBERS
OF OUR MANAGEMENT AND SCIENTIFIC STAFF AND THE RECRUITMENT OF ADDITIONAL
QUALIFIED PERSONNEL. We are dependent to a significant extent on the services of
our corporate officers and other key employees. There is intense competition
from other companies, research and academic institutions and other organizations
for qualified personnel with the same skills we require. There can be 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 a material adverse effect on our business and financial condition. We
do not currently maintain key man life insurance on any of our employees.
WE MAY NEED ADDITIONAL CAPITAL RESOURCES FOR THE CONTINUED OPERATION OF
OUR BUSINESS, WHICH COULD HAVE A DILUTIVE EFFECT ON YOUR OWNERSHIP INTEREST. We
cannot adequately predict the timing and amount of such capital requirements.
When we may need additional financing, and our ability to raise additional
financing depends on many factors. Some of these factors are:
* the progress of our research and development;
* the scope and results of any clinical trials;
* the extent to which the Virtual Biopsy(TM) System and other products
gain market acceptance;
* actions relating to regulatory and reimbursement matters;
* the effect of competitive products;
* the cost and effect of future marketing programs;
* the resources we devote to manufacturing and developing our
products; and
* general economic conditions and various other factors.
We can provide no assurances that we will not require additional
funding or that if we do, it will be available on terms satisfactory to us or at
all. We may be required to seek additional funds through debt or equity
financing, arrangements with corporate partners or from other sources.
10
<PAGE>
Your control and ownership could be substantially diluted if we issue additional
equity securities. We may have to cut back operations or give significant
technology or market rights to strategic partners if we cannot obtain additional
financing when we need it. If we need financing and fail to obtain it on terms
satisfactory to us, it could have a material adverse effect on our business and
financial condition.
OUR STOCK IS VOLATILE. The market price of our common stock has from
time to time experienced significant price and volume fluctuations beyond our
control and unrelated to our operating performance. Factors that may have a
significant adverse effect on the market price of our securities in the future
include, but are not limited to:
* fluctuations in our operating results;
* announcements of technological innovations or new diagnostic or
therapeutic products by SPECTRASCIENCE or by our competitors;
* government regulations;
* developments in patent or other proprietary rights;
* public concern as to the safety of products developed by
SPECTRASCIENCE or others; and
* general market or economic conditions.
Additionally, our common stock is thinly traded and trading in a small number of
shares of our securities, whether on the buy or sell side, may result in
significant price movements.
OUR STOCK IS SUBJECT TO RULES THAT LIMIT YOUR ABILITY TO SELL THE
SHARES OF OUR COMMON STOCK THAT YOU OWN. Our common stock is covered by a
Commission rule that imposes additional sales practice requirements on
broker-dealers who sell these securities to persons other than established
customers and accredited investors. An accredited investor is generally an
institution with assets in excess of $5,000,000 or an individual with a net
worth in excess of $1,000,000 or an annual income exceeding $200,000
individually or $300,000 jointly with his or her spouse. For transactions
covered by the rule, the broker-dealer must make a special suitability
determination with respect to the purchaser and receive the purchaser's written
agreement to the transaction prior to the sale. Consequently, the ability of
broker-dealers to sell our securities or of our shareholders to sell their
shares in the secondary market may be adversely affected.
WE FACE AN INHERENT BUSINESS RISK OF EXPOSURE TO PRODUCT LIABILITY
CLAIMS, WHICH COULD MATERIALLY ADVERSELY IMPACT OUR BUSINESS. Clinical trials or
marketing of any of our products may expose us to liability claims resulting
from the use of our products. These claims might be made directly by consumers,
health care providers or by others selling the products. We currently maintain a
product liability insurance policy with an aggregate and per occurrence limit of
$2,000,000. We can provide no assurance that such limits are sufficient to
protect us in the event of litigation. Moreover, there can be no assurance that
we will be able to maintain such insurance. If we are unable to maintain
insurance under terms acceptable to us, it could prevent or inhibit the clinical
testing or commercialization of products developed by us. Even if a product
liability claim is not successful, the time and expense of defending against
such a claim may adversely affect our business and results of operations.
ANTI-TAKEOVER PROVISIONS AVAILABLE TO US COULD DEPRIVE YOU OF AN
OPPORTUNITY TO SELL YOUR SHARES OF COMMON STOCK AT PRICES HIGHER THAN PREVAILING
MARKET PRICES. There are certain provisions of Minnesota law that are intended
to provide management flexibility to enhance the likelihood of continuity and
stability in the composition of our Board of Directors and in the policies that
they formulate, and to discourage an unsolicited takeover if the Board
determines that the takeover is not in the best interests of SPECTRASCIENCE and
its shareholders. These provisions could discourage attempts by other companies
to acquire us, and could prevent you from selling your shares of common stock at
prices that might be higher than prevailing market prices.
Our Board of Directors can issue up to 20,000,000 shares of
undesignated preferred stock and determine the price, rights, preferences and
privileges of those shares without any further vote or action by our
shareholders. The rights of holders of any preferred stock that we may issue in
the future may adversely affect your rights as a holder of common stock. At this
time we do not intend to issue any preferred stock, however, if we issued
preferred stock in connection with an acquisition or for other corporate
purposes, it could make it more difficult for a third party to acquire a
majority of our outstanding voting stock. See "Description of
Securities--Minnesota Business Corporation Act."
YOU WILL NOT HAVE THE ABILITY TO DIRECT HOW THE FUNDS YOU INVEST IN US
WILL BE USED. The net proceeds from this offering will be used for the purposes
described under "Use of Proceeds." We reserve the right to use the funds
obtained from this offering for other purposes not presently contemplated which
we deem to be in the best interest of SPECTRASCIENCE and our
11
<PAGE>
shareholders. This may vary from the purposes described under "Use of Proceeds"
in order to address current circumstances and opportunities. As a result, our
success will be highly dependent upon the discretion and judgment of management
with respect to the application and allocation of the net proceeds of the
offering. Investors purchasing the shares offered hereby will be entrusting
their funds to our management, with only limited information concerning
management's specific intentions. See "Use of Proceeds."
YOU WILL MOST LIKELY NOT RECEIVE A DIVIDEND ON OUR CAPITAL STOCK. We
have never paid or declared a dividend on our capital stock. We intend to retain
any earnings to fund development of our business and do not intend to pay any
cash dividends in the foreseeable future. See "Dividend Policy."
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. Forward-looking
statements are not historical facts. They are statements of our current
expectations, estimates and projections about our industry, our beliefs and our
assumptions. Words like "anticipate," "estimate," "expect," "may," "plans,"
"believes," "potential," and similar expressions are intended to identify
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and other factors.
Some of the risks, uncertainties and factors are beyond our control, are
difficult to predict and could cause our actual results to differ materially
from those expressed or forecasted in the forward-looking statements.
We caution you not to place undue reliance on these forward-looking
statements. They reflect management's view only as of the date of this
prospectus. We may not update these statements or publicly release any revisions
to the forward-looking statements that we may make to reflect events or
circumstances after the date of this prospectus, or to reflect the occurrence of
unanticipated events.
12
<PAGE>
USE OF PROCEEDS
The shares covered by this prospectus are being offered by certain of
our selling shareholders and not by us. Consequently, we will not receive any
proceeds from the sale of these shares. In the event the warrants and stock
options covered by this prospectus to purchase 139,250 shares of our common
stock are exercised we will receive up to $551,250 in additional proceeds. These
proceeds, if received, will be used for working capital purposes.
CAPITALIZATION
The following table sets forth at March 31, 2000 the actual
capitalization and the pro forma capitalization of SPECTRASCIENCE as adjusted
for the sale of shares of common stock in this prospectus after the balance
sheet date, as if such transaction had occurred as of March 31, 2000. The
information should be read in conjunction with the Financial Statements and
Notes thereto included in this Prospectus.
<TABLE>
<CAPTION>
March 31, 2000
Actual As Adjusted
(unaudited) (unaudited)
-------------- ------------
<S> <C> <C>
Long-term liabilities $ 31,962 $ 31,962
Shareholders' equity:
Undesignated preferred stock, $1.00 par value:
20,000,000 shares authorized, no shares issued and outstanding
Common stock, $.25 par value:
10,000,000 shares authorized, 6,760,821 shares issued and outstanding (1)(2)
10,000,000 shares authorized, 6,890,071 shares issued and outstanding (2) 1,690,205 1,722,518
Additional paid-in capital ........................................ 52,097,159 52,586,096
Accumulated deficit (3) ........................................... (49,255,707) (49,255,707)
------------ ------------
Total shareholders' equity ........................................ 4,531,657 5,052,907
------------ ------------
Total capitalization .............................................. $ 5,090,374 $ 5,611,624
============ ============
</TABLE>
--------------------
(1) Based on the number of shares of common stock outstanding on March 31,
2000, as adjusted for the issuance of
* 2,666 shares of common stock pursuant to a stock option exercise in
April 2000;
* the conversion of a demand note to 171,430 shares of common stock
and a warrant to purchase 85,715 shares of common stock on June 30,
2000; and
* the issuance of 10,000 shares of common stock pursuant to warrant
exercises in June 2000. The 10,000 shares of common stock issued
pursuant to the warrant exercises are being registered under this
prospectus.
(2) Excludes:
* 1,046,245 shares of common stock issuable upon exercise of
outstanding stock options under the Company's 1991 Stock Plan at a
weighted average exercise price of $4.73 per share;
* 317,000 shares of common stock issuable upon exercise of outstanding
stock options at a weighted average exercise price of $5.94 per
share; and
* 991,454 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $5.36 per share.
See "Management & Executive Compensation" and "Description of
Securities."
(3) Includes an accumulated deficit of $34,638,007 incurred prior to
October 1, 1992, which is the first day of the quarter in which the
Company began development of its current products and changed its name
to "SPECTRASCIENCE, Inc." See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General."
13
<PAGE>
SELLING SECURITY HOLDERS
Our selling shareholders would acquire their shares through the
exercise of options and warrants to purchase our common stock. The 139,250
shares of common stock that may be sold by our selling shareholders pursuant to
this prospectus were acquired in the following transactions.
* The selling agent for the private placement of our Series A
Convertible Preferred Stock acquired warrants to purchase 20,000
shares of common stock at $3.00 per share, expiring June 29, 2000.
The shares of common stock issuable upon the exercise of the
warrants were registered on a Form S-3 Registration Statement that
was declared effective June 7, 1996. The effectiveness of the
registration statement has lapsed and we are again registering,
under this prospectus, 10,000 of the 20,000 shares of common stock
issuable upon the exercise of the warrants. One warrant holder
exercised a warrant to purchase 10,000 of the 20,000 shares
issuable, while the registration statement was effective.
* The selling agent for the private placement of our Series B
Convertible Preferred Stock acquired warrants to purchase 79,250
shares of common stock at $5.00 per share, expiring December 28,
2000. The shares of common stock issuable upon the exercise of the
warrants were registered on a Form S-3 Registration Statement that
was declared effective June 7, 1996. The effectiveness of the
registration statement has lapsed and we are again registering,
under this prospectus, the 79,250 shares of common stock issuable
upon the exercise of the warrants.
* On June 6, 2000 SpectraScience received notification of the decision
of the judge in the case of Paul Gibson v. SpectraScience, Inc.
Pursuant to the Findings of Fact, Conclusions of Law, and Order for
Judgement, we are being required to register and make available,
50,000 shares of common stock, which Mr. Gibson can purchase at a
price of $2.50 per share. The court also ruled that Mr. Gibson's
option to purchase these shares is indefinite. Pursuant to the
order, we are registering 50,000 shares of common stock issuable
upon Mr. Gibson's tender of payment.
We granted registration rights to the selling shareholders holding the
warrants issued in connection with the Series B Convertible Preferred Stock
transaction, covering the common stock issuable upon the exercise of their
warrants. We did not grant registration rights to the selling shareholders
holding the warrants issued in connection with the Series A Convertible
Preferred Stock transaction nor did we grant registration rights to Mr. Gibson.
The shares issuable upon the exercise of the warrants are being registered to
permit public secondary trading of the shares, and the shares issuable upon
receipt of payment from Mr. Gibson are being registered pursuant to a court
order. The selling shareholders may offer their common stock for resale from
time to time. See "Plan of Distribution." The following table lists the selling
shareholders and information regarding the beneficial ownership of common stock
of each selling shareholder as well as the number of shares each selling
shareholder may sell pursuant to this prospectus.
<TABLE>
<CAPTION>
Number of Shares Maximum Number of Shares Number of Shares
Beneficially Owned to be Sold Pursuant to Beneficially Owned
Name Prior to this Offering this Prospectus After this Offering (1)
---- ---------------------- --------------- -------------------
<S> <C> <C> <C>
John E. Feltl * 5,000 (2) *
Paul F. Gibson * 50,000 (4) *
Richard B. Heise * 5,000 (2) *
David B. Johnson * 29,719 (3) *
Paul R. Kuehn * 29,719 (3) *
Eldon C. Miller * 9,906 (3) *
Stanley D. Rahm * 9,906 (3) *
</TABLE>
--------------------
* Represents less than 1% of our outstanding common stock as of June 30,
2000.
(1) Assumes the sale of the shares offered by this prospectus.
(2) Represents 10,000 shares of common stock issuable upon the exercise of
warrants held by the selling agent for the private placement of Series
A Convertible Preferred Stock.
14
<PAGE>
(3) Represents 79,250 shares of common stock issuable upon the exercise of
warrants held by the selling agent for the private placement of Series
B Convertible Preferred Stock.
(4) Represents 50,000 shares of common stock issuable upon payment of $2.50
per share.
PLAN OF DISTRIBUTION
We are registering the shares on behalf of the selling shareholders.
Selling shareholders include donees and pledgees of those who are named in this
prospectus under the heading "Selling Shareholders," who will sell shares of
common stock that they received from those parties. The selling shareholders
will offer and sell the shares of common stock registered under this prospectus
for their own accounts. We will receive no proceeds from the sale of the common
stock but will receive gross proceeds of $551,250 if all of the warrants and
options registered under this prospectus are exercised. We will bear all of the
expenses and fees of the registration of the shares.
The selling shareholders may offer and sell the shares from time to
time at prices relating to prevailing market prices or at negotiated prices in:
* the over-the-counter market in regular brokerage transactions;
* transactions directly with market makers;
* privately negotiated transactions;
* through put or call options transactions;
* through short sales; or
* a combination of such methods of sales.
Sales may be made to or through brokers or dealers who may receive compensation
in the form of discounts, concessions or commissions from the selling
shareholders or the purchasers of the shares. As of the date of this prospectus,
we are not aware of any agreement, arrangement or understanding between any
broker or dealer and the selling shareholders. There is no assurance that the
selling shareholders will sell any or all of the shares of common stock that
they offer.
The selling shareholders and any brokers or dealers who participate in
the sale of the common stock may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933, as amended. If so, any commissions
received by them and any profits realized by them on the resale of the shares
may be deemed to be underwriting discounts or commissions. Because selling
shareholders may be deemed to be "underwriters," they will be subject to the
prospectus delivery requirements of the Securities Act.
Selling shareholders may also resell all or a portion of the common
stock in open market transactions, relying upon Rule 144 under the Securities
Act, provided that they meet the criteria and conform to the requirements of
Rule 144.
LEGAL PROCEEDINGS
On or about September 4, 1998, SPECTRASCIENCE was 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 SPECTRASCIENCE, had a contract that entitled him to receive options for
50,000 shares of common stock at an exercise price of $2.50 per share.
SpectraScience contended that the options never vested.
On November 3, 1999, the court issued an order holding that Mr. Gibson
was entitled to enforce the contract relating to such options. On March 13, 2000
a trial was held for the purpose of determining settlement. At trial,
SpectraScience further contended that the contract should have been
unenforceable, and compensation would be prohibited since Mr. Gibson acted as a
broker-dealer but was not a registered broker-dealer. On June 2, 2000, the judge
in the case ruled that the company must have available sufficient registered
stock for Mr. Gibson no later than August 31, 2000, that the options have no
expiration date, that the company shall provide freely tradeable registered
shares within 72 hours of Mr. Gibson's choosing to exercise, that the company
shall not impede Mr. Gibson in the exercise process, and that there shall be
monetary damages of $3,000 per day for time delays beyond August 31, 2000 and
time delays beyond the 72 hour period in providing the common stock
certificates.
15
<PAGE>
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The names, ages and positions of the executive officers, key management
personnel and directors of SPECTRASCIENCE are listed below.
NAME AGE POSITION
---- --- --------
Chester E. Sievert, Jr...............48 Chairman of the Board, President and
Chief Executive Officer
Scott G. Anderson....................45 Vice President Marketing & Sales
Ruth M. Bryan........................37 Controller, Interim Chief Financial
Officer
Henry M. Holterman(1) (2)............45 Director
Johan A.P.M. de Hond(1) (2)..........46 Director
------------------
(1) Member of the Audit Committee of the Board of Directors
(2) Member of the Compensation Committee of the Board of Directors
CHESTER E. SIEVERT, JR. has served as Chairman of the Board since June
18, 1999. He has held the title of President and Chief Executive Officer since
January 5, 1999. He joined SPECTRASCIENCE as a consultant in June 1996, and has
held various executive positions since November 1996. Prior to joining
SPECTRASCIENCE, Mr. Sievert was a founder of and worked at two medical product
companies; ReTech, Inc. from 1980 to 1986; and FlexMedics Corporation from 1986
to 1995. As a former academic scientist on staff at the University of Minnesota
College of Medicine and the Veterans Administration Medical Center, Mr. Sievert
published extensively in the fields of gastroenterology, urology and fiber
optics. Mr. Sievert has a Bachelor of Science Degree in Comparative Physiology
from the University of Minnesota.
SCOTT G. ANDERSON joined SPECTRASCIENCE on February 7, 2000 as Vice
President Marketing & Sales. Mr. Anderson has over 22 years of sales and
marketing experience within the Medical Devices Industry. From 1995 until
joining SpectraScience he was Manager of Business Development for Olympus
America, Inc., the worldwide leader in endoscopic and imaging devices in
gastroenterology. During his 20-year career at Olympus Mr. Anderson held senior
management positions in business development, operations and sales. Mr. Anderson
has a Bachelor of Science Degree in Biology from Bard College, New York.
RUTH M. BRYAN has been the Controller for SPECTRASCIENCE since January
1999. She joined the company in August 1996. From August 1991 to August 1996 she
was with Fort Sill National Bank, a consumer bank in Oklahoma, in various
positions, including loan officer. She also has five years experience in
government purchasing and contracting. Ms. Bryan has a Bachelor of Science
Degree in Business Administration from the University of Maryland, and is a
C.P.A.
HENRY M. HOLTERMAN has served as a director of SPECTRASCIENCE since
March 1992. Since 1991, he has been the Managing Director of Reggeborgh Beheer
BV, a company located in the Netherlands that invests in companies and owns
property projects generally located in the Netherlands. Mr. Holterman is a
chartered accountant and from 1987 to 1991, was group controller for Transport
Development Group PLC and the Dutch Holding Company ETOM NV.
JOHAN A.P.M. DE HOND, M.D. has served as a director of SPECTRASCIENCE
since June 18, 1999. He has been with Hospital Sophia in Zwolle, and Hospital
Diaconesse in Meppel, The Netherlands, since 1992 as a Senior Urologist. Dr. de
Hond completed his medical education in 1979 at the University of Utrecht, also
in The Netherlands. Dr. de Hond's background includes specialty training in
surgery as well as urology. Dr. de Hond has a clinical interest in photodynamic
therapy.
SPECTRASCIENCE's Bylaws authorize the Board of Directors to fix the
number of directors from time to time, and the number is currently set at five
directors. There are currently two vacancies on the Board. All directors hold
office until the next annual meeting of the shareholders or until their
successors have been elected and qualified. Officers serve at the discretion of
the Board of Directors. There are no family relationships between any of the
directors or executive officers of SPECTRASCIENCE.
16
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE
The functions of the Audit Committee are to review the internal and
external financial reporting of the Company; to review the scope of the
independent audit; and to consider comments by the auditors regarding internal
controls and accounting procedures and management's response to any such
comments.
COMPENSATION COMMITTEE
The functions of the Compensation Committee are to recommend the
compensation for those officers who are also directors and for senior
management; to review senior management's objectives; and to make
recommendations to the Board of Directors regarding the administration of, and
the grant of options under, the Company's 1991 Stock Plan.
MEDICAL AND SCIENTIFIC ADVISORY BOARD
Management and staff consult on different aspects of our scientific
research and development programs, with members of SPECTRASCIENCE's Medical and
Scientific Advisory Board. The Board is composed of individuals with expertise
in various medical specialties who are able to provide advice regarding the
development of our products and systems, the design of our clinical trials,
regulatory strategies and reimbursement issues. A list of the current members of
the Medical and Scientific Advisory Board with brief biographies is set forth
below.
MERRILL A. BIEL, M.D., PH.D. is President and Staff Physician at Ear,
Nose & Throat SpecialtyCare of Minnesota in Minneapolis, Minnesota. He is an
Associate Professor in the Departments of Otolaryngology, Head and Neck Surgery,
and Family Practice at the University of Minnesota and is Clinical Professor at
the University of Minnesota School of Veterinary Medicine. He is the Director of
Photodynamic Therapy at Abbott Northwestern Hospital and is President of Advance
Photodynamic Technologies in Minneapolis. He is a Fellow of the Society of
Surgical Oncology, American Society of Head and Neck Surgery, American Society
of Clinical Oncology, and the Triologic Society. Dr. Biel received his M.D.
degree from the University of Illinois in Chicago, Illinois and his Ph.D. degree
from the University of Minnesota in Minneapolis, Minnesota.
DOUGLAS M. HAWKINS, PH.D. is a Professor of Statistics and the Chairman
of the Department of Applied Statistics at the University of Minnesota. He is a
member of the International Statistical Institute, a fellow of the American
Statistical Association and a senior member of the American Society for Quality.
He is also an associate editor of the Journal for the American Statistical
Association. Dr. Hawkins received his Ph.D. degree from the Witwatersrand
University, Johannesburg, South Africa, in 1969.
JOSE JESSURUN, M.D. is an Associate Professor of Pathology at the
University of Minnesota and is the Director of Surgical Pathology, Department of
Laboratory Medicine and Pathology, at the University of Minnesota. He is a
member of the Latin American Society of Pathology, the United States and
Canadian Academy of Pathology and the Minnesota Society of Clinical Pathology.
Dr. Jessurun received his M.D. degree from the National Autonomous University of
Mexico in Mexico City in 1977, was the chief resident in surgical pathology at
Massachusetts General Hospital from 1983-84 and has been an Associate Professor
at the University of Minnesota since 1991.
DELWIN K. OHRT, M.D. is the Vice President of Clinical Resources and
Medical Affairs for Volunteer Hospitals of American Upper Midwest, Inc. in
Minneapolis, Minnesota. He was formerly the Medical Director and Chairman of the
Medical Technology Assessment Committee of Blue Cross and Blue Shield of
Minnesota and the Senior Vice President of Blue Plus. He is a member of the
Uniform Clinical Data Advisory Panel of the American Hospital Association, the
Minnesota Medical Association Practice and Planning Committee and the Health
Technology Advisory Committee of the Minnesota Health Care Commission. Dr. Ohrt
received his M.D. degree from the University of Nebraska in 1965.
KENNETH K. WANG, M.D. is an Assistant Professor at the Mayo Medical
School in Rochester, Minnesota. He is a member of the Gastroenterology Research
Committee at the Mayo Clinic and the Director of the Laser Photodynamics
Laboratory. He is also serving on the American Society for Gastrointestinal
Endoscopy Informatics Committee and the Education and Technology Subcommittee of
the American Gastroenterology Association. Dr. Wang received his M.D. degree
from Wayne State University in Detroit, Michigan and has been an Assistant
Professor at the Mayo Medical School since 1989.
17
<PAGE>
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
The Company pays each non-employee director $500 for each Board of
Directors' meeting and committee meeting attended and reimburses each such
director for reasonable travel and out-of-pocket expenses for attendance at
these meetings. Employee directors are not entitled to any compensation for
attendance at Board of Directors' and committee meetings.
Pursuant to the Company's 1991 Stock Plan, as amended, each
non-employee director is entitled to receive an option to purchase 10,000 shares
of common stock when first elected to the Board of Directors. Prior to October
1996, non-employee directors were entitled to receive an initial option grant of
25,000 shares of common stock. Additionally, each non-employee director is
entitled to receive an automatic grant of options to purchase 5,000 shares of
common stock upon re-election to the Board each year the 1991 Stock Plan is in
effect. The exercise price of the option is based on the greater of the
prevailing market price, which is defined as the closing price of the common
stock on the date of grant; or the average of the closing prices of the common
stock for the ten trading days immediately prior to the date of grant.
The options granted to non-employee directors under the Company's 1991
Stock Plan expire ten years from the date of grant subject to earlier
termination in the event of death, are not transferable except by will or the
laws of descent and distribution, and become fully exercisable one year after
the date of grant.
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows for the past three fiscal years, compensation
awarded, paid to, or earned by the Company's Chief Executive Officer and to all
executive officers whose salary and bonuses exceeded $100,000 for the fiscal
year ended December 31, 1999 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
Annual Compensation Awards Payouts
----------------------------------------- ---------------------- -------
Other Securities
Annual Restricted Underlying All Other
Compen- Stock Option/s LTIP Compen-
Name and Principal Position Year Salary Bonus sation(1) Award(s) SARs Payouts sation (5)
--------------------------- ---- -------- ------- --------- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Chester E. Sievert, Jr. 1999 $135,000 $44,000 $6,000 -- 100,000 (2) -- $5,300
President and Chief 1998 110,000 -- 6,000 -- 145,000 (3) -- 3,300
Executive Officer 1997 92,500 15,000 6,000 -- 85,000 (4) -- 1,712
</TABLE>
--------------------
(1) Other Annual Compensation consists of a car allowance of $500 per
month.
(2) Details of these option grants are provided in the following table
entitled "Option Grants in Last Fiscal Year."
(3) Represents a ten-year stock option with an exercise price of $4.0833
per share for 45,000 shares of common stock, granted pursuant to the
1991 Stock Plan. Six thousand of these shares vest immediately, with
the remainder vesting one-third per year over three years. Mr. Sievert
was also granted two ten-year stock options, each for 50,000 shares of
common stock, both of which are vested. One stock option grant vested
upon the successful filing with the FDA of a pre-market approval
application, and the other option vested on November 19, 1999, when
SPECTRASCIENCE received a recommendation for approval of its pre-market
approval application by an FDA medical device panel. Both options have
an exercise price of $4.4141 per share.
(4) Includes a ten-year stock option for 50,000 shares of common stock
which will vest in its entirety upon the successful completion of the
clinical studies on the Virtual Biopsy(TM) System and the filing with
the FDA of a pre-market notification package and final FDA product
approval; and a ten-year option for 35,000 shares, vesting one-third
per year over three years. Both options have an exercise price of
$3.9125.
(5) All Other Compensation includes amounts contributed to the
SPECTRASCIENCE Savings and Retirement Plan, which qualifies as a 401(k)
Plan under the Internal Revenue Code of 1986, as amended.
(6) Mr. Sievert was granted a ten-year stock option for 50,000 shares of
common stock, vesting one-third per year over three years. The option
has an exercise price of $4.50. These options were granted in January
2000 and are not included in the table above.
(7) Mr. Scott G. Anderson was hired in February 2000. He is an officer of
the company and was granted a ten-year stock option for 300,000 shares
of common stock, one-third vesting on the one year anniversary, and the
remaining two-thirds vesting upon performance milestones. The option
has an exercise price of $6.0688.
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<PAGE>
OPTION GRANTS
The following table sets forth information concerning individual grants
of stock options made to the Named Executive Officers named in the Summary
Compensation Table. No stock appreciation rights ("SARs") were granted or
exercised for the year ended December 31, 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------
Number of % of Total Potential Realizable Value
Securities Options Granted Exercise or at Assumed Annual Rates of
Underlying to Employees in Base Price Expiration Stock Price Appreciation
Options Granted Fiscal Year ($/Sh) (3) Date for Option Term (4)
--------------------------
5% 10%
--------------- --------------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Chester E. Sievert, Jr. 50,000 (1) 41.5% $4.2000 4/19/2009 $132,068 $334,686
50,000 (2) $4.0063 8/25/2009 $125,977 $319,251
</TABLE>
--------------------
(1) Ten-year stock option for 50,000 shares of common stock with an
exercise price of $4.20 per share, vesting one-third per year over
three years, granted pursuant to the 1991 Stock Plan. All shares will
be vested by April 19, 2002.
(2) Ten-year stock option for 50,000 shares of common stock with an
exercise price of $4.0063 per share, vesting immediately, granted
pursuant to the 1991 Stock Plan.
(3) The exercise price was determined based on the greater of the
prevailing market price, which is defined as the closing price of the
common stock on the date of grant; or the average of the closing prices
of the common stock for the ten trading days immediately prior to the
date of grant.
(4) Potential realizable value is net of exercise price, but before taxes
associated with exercise. Potential realizable value is based on an
assumption that the market price of the stock appreciates at the stated
rate, compounded annually, from the date of grant until the end of the
ten-year option term, multiplied by the number of options granted.
These values are calculated based on regulations promulgated by the
Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price appreciation. There is no assurance that
the actual stock price appreciation over the ten-year option term will
be at the assumed 5% or 10% levels, or at any other defined level.
OPTION VALUES
The following table sets forth certain information concerning
individual exercises of stock options during the year ended December 31, 1999
and the value of unexercised stock options as of December 31, 1999 for the Named
Executive Officer. No shares were acquired through the exercise of options by
the Named Executive Officer during 1999.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of unexercised
Shares Number of Securities In-the-Money
acquired on Value Underlying Unexercised Options/SARs
exercise realized Options/SARs at FY-end at FY-end (1)(2)
------------ -------- --------------------------- ---------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Chester E. Sievert, Jr. (3) -- -- 159,412 187,667 $2,042 $4,375
</TABLE>
--------------------
(1) Upon the exercise of an option, the optionee must pay the exercise
price in cash or stock. Stock options are "in-the-money" if the closing
price for the common stock is greater than the exercise price of the
stock options. The closing price for the common stock on December 31,
1999 was $4.00 per share. The closing price for the common stock on
June 30, 2000 was $6.50. The value of the options is calculated by
taking the difference between the exercise price and the closing bid
price on December 31, 1999 or June 30, 2000, and multiplying this
difference by the number of option shares. When the exercise price was
higher than the market value of the common stock, the option was not
"in-the-money." The value of exerciseable and unexerciseable
"in-the-money" options held by Mr. Sievert as of December 31, 1999 is
shown in the table above. Mr. Sievert held 250,745 exerciseable options
and 146,334 unexerciseable options as of June 30, 2000.
(2) Does not include the number or value of unexercisable options granted
subsequent to December 31, 1999. No SARs were held by any of the Named
Executive Officers on December 31, 1999.
19
<PAGE>
(3) As of December 31, 1999, "in-the-money" options include 23,333 shares
that are exercisable and 50,000 shares that are unexercisable. The
unexerciseable shares become exerciseable upon final FDA approval of
the Virtual Biopsy(TM) System. The exercise price for both options is
$3.9125. The value of exerciseable "in the money" options held by Mr.
Sievert as of June 30, 2000 was $562,191, and the value of
unexerciseable "in-the-money" options held by Mr. Sievert as of June
30, 2000 was $337,460. As of June 30, 2000, "in-the-money" options
include 248,666 shares which are exerciseable and 146,334 shares which
are unexerciseable. Upon final FDA approval of the Virtual Biopsy(TM)
System, an additional 50,000 shares will become exerciseable.
EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL AGREEMENTS
Except as described below, SPECTRASCIENCE does not have employment
agreements with its executive officers.
SPECTRASCIENCE entered into a Severance Agreement with Mr. Sievert on
May 21, 1997, providing for severance pay in the event of a "Change in Control"
(as defined in the Severance Agreement). The Severance Agreement provides for
severance pay if his employment is terminated, either voluntarily or
involuntarily, during the three-year period following a Change in Control. The
severance payment shall be equal to full compensation for one year and payment
will be made in a lump sum upon termination. In addition to the severance
payment, Mr. Sievert will be entitled to the following benefits upon a Change in
Control:
* 18 months of life, accident and health and dental insurance
benefits;
* 12 months of out-placement services;
* complete coverage for fiduciary liability and directors' and
officers' insurance for a period of six years after a Change in
Control;
* indemnification for any losses that might result from actions taken
in good faith before the "Date of Termination" (as defined in the
Severance Agreement);
* reimbursement for all legal fees and expenses incurred as a result
of termination, except to the extent such payment would constitute a
"parachute payment" within the meaning of Section 280G(b)(2) of the
Code;
* all benefits under the Company's Savings and Retirement Plan, or any
successor to such plan and any other plan or arrangement relating to
retirement benefits;
* all benefits and rights under any and all Company stock purchase,
restricted stock grant and stock option plans or programs, or any
successor to any such plans or programs, which shall be in addition
to, and not reduced by, any other amounts payable under the
Severance Agreement; and
* immediate vesting of all outstanding but unvested options.
If there had been a Change in Control for the fiscal year ended December 31,
1999, and the employment of Mr. Sievert was immediately terminated, Mr. Sievert
would have been entitled to receive, pursuant to the terms of his Severance
Agreement, a lump sum payment upon termination of $216,000.
All stock option agreements outstanding under the Company's 1991 Stock
Plan provide for the acceleration of exercisability of options immediately prior
to a Change in Control, except in certain cases where the optionee is terminated
for "cause" or resigns without "good reason".
1991 STOCK PLAN
In 1991, SPECTRASCIENCE adopted the 1991 Stock Plan, under which
1,624,000 shares of common stock were initially reserved for issuance upon
exercise of options granted to selected employees and non-employees of the
Company. After the Company's one-for-five reverse stock split on July 1, 1994,
there were 325,000 shares of common stock reserved for issuance upon exercise of
options. Subsequently, the plan was amended to reserve a total of 1,640,000
shares for issuance upon exercise of options. The plan provides for the grant of
both stock options intended to qualify as incentive stock options as defined in
the Internal Revenue Code of 1986, as amended, and nonqualified stock options.
Subject to the limitations set forth in the 1991 Stock Plan, the
Compensation Committee of the Board of Directors has the authority to select the
persons to whom grants are to be made, to designate the number of shares to be
covered by each option, to determine whether an option is to be an incentive
stock option or a nonqualified stock option, to establish vesting schedules and,
subject to certain restrictions, to specify other terms of the options. The
maximum term of options granted under the plan is ten years. Options granted
under the plan generally are nontransferable and expire two years after the
termination of an optionee's death, termination of employment or consulting
relationship with the Company.
20
<PAGE>
The exercise price of options granted under the 1991 Stock Plan is
determined by the Board of Directors or the Compensation Committee based on the
greater of the prevailing market price, which is defined as the closing price of
the common stock on the date of grant; or the average of the closing price of
the common stock for the ten trading days immediately prior to the date of
grant. The exercise price of stock options must equal 85% of the fair market
value of the common stock on the date of grant or, in the case of incentive
stock options, must equal 100% of fair market value of the common stock on the
date of grant. As of December 31, 1999, the Company had outstanding options to
purchase an aggregate of 1,042,931 shares held by 24 persons at a weighted
average exercise price of $4.68 per share. As of December 31, 1999, a total of
448,069 options granted pursuant to the 1991 Stock Plan had been exercised.
As of June 30, 2000 SPECTRASCIENCE had outstanding options to purchase
an aggregate of 1,046,245 shares of common stock under the 1991 Stock Plan, and
a total of 593,755 options granted pursuant to the 1991 Stock Plan had been
exercised. As of June 30, 2000 SPECTRASCIENCE had issued and outstanding 317,000
stock options outside of the 1991 Stock Plan.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the SPECTRASCIENCE common stock as of June 30, 2000, by
each director or Named Executive Officer of the Company, each person or entity
known by the Company to own beneficially more than five percent of the common
stock; and all the directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Amount and Percent of
Nature of Class
Beneficial Beneficially
Name and Address of Beneficial Owner Title of Class Ownership Owned (8)
<S> <C> <C> <C>
Reggeborgh Beheer BV
Postbox 319,7460 AH Rijssen, The Netherlands Common Stock 816,145 (1) 11.7%
Perkins Capital Management, Inc. and
The Perkins Opportunity Fund
730 East Lake Street, Wayzata, MN 55391-1769 Common Stock 596,512 (2) 8.7%
Nathaniel S. Thayer
150 Main Street, P.O. Box 1325, Pawtucket, RI 02862 Common Stock 431,778 (3) 6.3%
Chester E. Sievert, Jr.
14405 21st Avenue N, Suite 111
Minneapolis, MN 55447 Common Stock 250,745 (4) 3.6%
Henry M. Holterman Common Stock 26,000 (5) 0.4%
Johan A.P.M. De Hond
Van Hambroeckmarke 1, 8016 KM Zwolle
The Netherlands Common Stock 25,000 (6) 0.4%
Officers and Directors as a Group (3 persons) Common Stock 301,745 (7) 4.3%
</TABLE>
---------------------
(1) Includes 605,430 shares held by Reggeborgh Beheer BV and 210,715 shares
issuable upon the exercise of warrants that are exercisable within 60
days of June 30, 2000.
(2) Includes 421,512 shares owned by Perkins Capital Management, Inc. and
175,000 shares owned by The Perkins Opportunity Fund (collectively
"Perkins"). The shares beneficially owned by Perkins also include
105,836 shares issuable upon exercise of warrants held by Perkins or
their clients within 60 days of June 30, 2000.
(3) Includes 383,578 shares owned by Mr. Thayer, 48,000 shares issuable
upon exercise of options that are exercisable within 60 days of June
30, 2000 and 200 shares held in a joint account in which Mr. Thayer has
a 50% beneficial interest. Mr. Thayer was previously a non-employee
director of the Company and is a partner of the law firm of Blais
Cunningham & Crowe Chester.
(4) Includes 250,745 shares issuable upon exercise of options that are
exercisable within 60 days of June 30, 2000. Excludes 50,000 shares
issuable upon exercise of options that will vest upon final FDA
approval for the Virtual Biopsy(TM) System. Mr. Sievert is Chairman,
President and Chief Executive Officer of SPECTRASCIENCE.
(5) Includes 26,000 shares issuable upon exercise of options that are
exercisable within 60 days of June 30, 2000. Mr. Holterman is a
non-employee director of the Company, and is the Managing Director of
Reggeborgh Beheer BV (see footnote 1).
(6) Includes 25,000 shares issuable upon exercise of options that are
exercisable within 60 days of June 30, 2000. Mr. De Hond is a
non-employee director.
21
<PAGE>
(7) Includes 301,745 shares issuable upon exercise of options held by all
directors and executive officers (3 persons) that are exercisable
within 60 days of June 30, 2000. Excludes 50,000 shares issuable upon
exercise of options by Mr. Sievert upon the successful completion of a
performance milestone.
(8) Based upon 6,760,821 shares of common stock outstanding on June 30,
2000.
CERTAIN TRANSACTIONS
There are no material transactions between the Company and its
directors or executive officers. All future transactions, including loans,
between the Company and its officers, directors, principal shareholders and
their affiliates will be approved by a majority of the Board of Directors,
including a majority of the independent and disinterested outside directors, and
will continue to be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
22
<PAGE>
DESCRIPTION OF BUSINESS
GENERAL
The following discussion contains forward-looking statements that
involve risks and uncertainties. SpectraScience's actual results could differ
materially from the results discussed. Factors that could cause or contribute to
such differences are noted in the risk factors section.
SPECTRASCIENCE was incorporated in the state of Minnesota in 1983 as GV
Medical, Inc. In 1992, we discontinued the cardiovascular business of GV Medical
and redirected our development efforts on diagnostic products utilizing
spectroscopic techniques. With our shift in business, we decided that a name
change was appropriate and subsequently changed our name to SPECTRASCIENCE, Inc.
SPECTRASCIENCE, Inc. develops and manufactures innovative, minimally
invasive "spectrophotometry systems" to facilitate real-time differentiation
between normal, and pre-cancerous or cancerous tissue. For the past three years
SPECTRASCIENCE has been focused on the design, development, clinical testing,
and regulatory approval of the Virtual Biopsy(TM) System as an adjunctive tool
during endoscopy of the colon. Our Virtual Biopsy(TM) System aids endoscopists
performing endoscopic procedures of the colon in the determination of whether
tissue is normal, as opposed to pre-cancerous or cancerous, by directing light
at the tissue through an optical fiber and obtaining an immediate analysis. Use
of our system can significantly improve the endoscopist's diagnostic accuracy.
This will:
* enable the physician to immediately determine the best course of
treatment for the patient
* reduce the need for additional procedures,
* minimize the number of biopsies taken; and
* permit the physician to combine a diagnostic and therapeutic
procedure in one visit.
In addition, endoscopists can be easily trained to use SPECTRASCIENCE's system
because it is compatible with existing endoscopes, needs no special
interpretative skills, and incorporates accessory instrument designs currently
being used by the endoscopists.
We believe that our principal product, the Virtual Biopsy(TM) System,
will enable us to be the "first to market" with an optical biopsy system
employing proprietary fluorescence spectroscopy that aids the endoscopist in the
differentiation of healthy, and pre-cancerous or cancerous tissues in the colon.
We believe that the Virtual Biopsy(TM) System will facilitate more accurate and
earlier detection of pre-cancerous or cancerous tissue in the colon, which can
lead to earlier, more effective treatment, which results in increased survival
rates, improved patient quality of life, and reduced patient care costs. It is
estimated that approximately 4.5 million gastrointestinal endoscopic procedures
are currently performed in the United States each year, and the number of these
procedures has been growing at a rate of approximately 5% per year.
RESEARCH AND DEVELOPMENT
Our research and development expenditures for the quarter ended March
31, 2000 were $334,573, $1,356,986 for the year ended December 31, 1999, and
$1,719,171 for the year ended December 31, 1998. We intend to continue to make
significant investments in research and development. Research and development
activities are performed by our employees and outside consultants.
Our research and development efforts during the past three years have
been focused primarily on:
* designing and developing our biopsy forceps and fiber,
* designing and developing the Virtual Biopsy(TM)System to be capable
of aiding the endoscopist in differentiating between normal and
pre-cancerous or cancerous tissue in the colon, and
* conducting and monitoring clinical trials at multiple sites.
In addition, clinical feasibility studies to detect esophageal cancer have begun
at two sites.
Upon FDA approval, we expect that our research and development efforts
will focus on conducting post-FDA clearance outcome-based clinical studies. The
purpose of these studies will be to market the Virtual Biopsy(TM) System to
HMOs, as well as support and establish reimbursement codes for the Virtual
Biopsy(TM) System. In addition, we plan to expand the gastrointestinal
applications for the Virtual Biopsy(TM) System to patients with Barrett's
esophagus.
23
<PAGE>
INDUSTRY OVERVIEW
COLORECTAL CANCER
The American Cancer Society estimates that 129,400 new cases of
colorectal cancer are detected in the United States annually, and that more than
56,500 people died of colorectal cancer in the United States in 1999. Colorectal
cancer accounts for approximately 10% of cancer deaths and is second only to
lung cancer as the leading cause of cancer deaths in the United States. Because
of age or other factors, 80 to 90 million people are considered at risk for
colorectal cancer.
Using current techniques to detect and treat colorectal cancer, the
five-year survival rate is as follows:
* 91% if detected and treated at an early stage;
* 35 to 66% if the cancer spreads outside the colon to nearby organs
or the lymph nodes;
* less than 10% for those patients in whom the cancer has spread
further to the liver or other organs.
Unfortunately, only 37% of colorectal cancer is currently found at the
early stage. Studies indicate that screening can prevent 20-40% of potential
colorectal cancers and up to 30-50% of colorectal cancer deaths. Additionally,
recent government studies show that the cost per year of life saved by
colorectal cancer screening is about $15,000-$20,000 -- compared to the $40,000
average yearly cost of care per patient who develops cancer. Early detection is
therefore critical to long-term survival rates.
COLORECTAL BIOPSIES
The gold standard method for documenting colorectal cancer is through
an excisional biopsy during a colon endoscopy. The excisional biopsy process
however, is often unreliable because it is dependent on the skill of the
endoscopist in making an accurate visual determination through an endoscope as
to which tissue samples to harvest for analysis in a pathology laboratory. The
endoscopist's visual interpretation as to the size, texture, color and location
of the polyp is what determines which, if any, tissue to biopsy. In addition,
excisional biopsies involve certain risks to patients, including bleeding or
perforation of the colon wall. Furthermore, the waiting period for obtaining
excisional biopsy results typically ranges from several days to several weeks.
DETECTION OF COLORECTAL CANCER
Colorectal cancer is primarily diagnosed through the detection and
analysis of polyps. Colon polyps are small masses of tissues in the colon that
may be either benign or malignant. Since most polyps are asymptomatic, they are
usually found incidentally during a preliminary endoscopic screening examination
called a flexible sigmoidoscopy. Current management guidelines officially
endorsed by the American Society for Gastrointestinal Endoscopy and the American
Gastroenterological Association provide that the size of the polyp is the most
important factor in determining appropriate therapy. Large polyps are usually
removed by a polypectomy, whereas small polyps require individual analysis and
treatment.
During a flexible sigmoidoscopy, the endoscopist first makes a
subjective, visual assessment of the polyp to evaluate it for size, texture,
color, location and thus the potential pathology. The endoscopist determines
whether the polyp is large, defined as greater than 1.0 cm, or small, defined as
less than 0.5 cm, by visual assessment, without physical measurement. If the
polyp is considered to be large, the patient will be referred on for a full
colonoscopy where the polyp will be removed and the entire colon will be
examined for additional polyps. If a polyp is considered to be small, the
endoscopist must make a further subjective visual determination as to whether it
is benign or potentially malignant. Based on the determination, the endoscopist
may refer the patient on for a full colonoscopy, perform a biopsy, if the
examining endoscopist performs biopsies, or place the patient under
surveillance. Generally, if a polyp is determined to be benign, no further
colonoscopy or therapy is indicated and surveillance may be recommended. If it
is deemed to be malignant or potentially malignant, a colonoscopy and subsequent
removal is indicated.
Human error on the part of the endoscopist can occur at various stages
during a colon cancer screening examination. The first opportunity for error is
in visually determining the size of a polyp, the second is in visually assessing
whether a small polyp is benign or malignant, and another opportunity for error
arises when determining which polyps should be sampled and where to sample them
if a biopsy is indicated. Medical literature reports that accuracy rates among
general endoscopists in visually
24
<PAGE>
determining polyp size can range from 60%-80%; and accuracy rates in determining
the potential malignancy of polyps can range from 50%-80%. In both cases, the
accuracy is dependent on the interpretive skills of the endoscopist. Accurate
characterization of a polyp is critical because recent data has shown that
40%-60% of small polyps are either malignant or potentially malignant.
With such important consequences resulting from the evaluation of a
polyp as benign or malignant, the endoscopist may perform a tissue biopsy or
refer the patient on to full colonoscopy, even if such a procedure might
otherwise appear to be unnecessary. Typical clinical management guidelines for
biopsy of multiple small polyps are that the endoscopist would take a random
representative sample for histology and pathologic interpretation. Since the
endoscopist must still rely on a subjective judgment of where and which polyps
to sample, the potential for human error still exists.
Compared to traditional biopsies, optical biopsies are intended to
improve diagnostic accuracy by providing objective, quantitative analysis in
combination with the endoscopist's visual interpretation. Quantitative
information should facilitate better comparison of results and patient outcomes
between endoscopists, and the real-time analysis provided by optical biopsies
eliminates the time patients must wait for pathology results and the need to
reschedule a secondary procedure.
BARRETT'S ESOPHAGUS
Barrett's esophagus is considered a pre-cancerous condition that is
normally found in the lower esophagus. Barrett's patients suffer from chronic
acid reflux, which causes stomach cells to eventually migrate into the lower
esophagus. The cells that line the esophagus have a distinctly different
appearance from those that line the stomach, and therefore can easily be
identified during an endoscopic examination. Biopsies are taken during the
examination, and are examined for abnormal changes in size, appearance or
cancerous cell growth. These tissue changes are considered to be the precursor
of cancer of the lower esophagus.
THE SPECTRASCIENCE SOLUTION
We have developed the Virtual Biopsy(TM) System to provide a minimally
invasive and cost-effective adjunctive tool that will aid the endoscopist in
determining whether polyps are normal, as opposed to potentially cancerous or
cancerous, without removing tissue from the body or waiting for pathology
results.
VIRTUAL BIOPSY(TM) SYSTEM
The Virtual Biopsy(TM) System allows the endoscopist to distinguish in
real time whether colon tissue is normal, pre-cancerous or cancerous, by
directing light at tissue through an optical fiber and obtaining an immediate
analysis. Use of our system can significantly improve the endoscopist's
diagnostic accuracy; enabling the endoscopist to immediately determine the best
course of treatment for the patient, reducing the need for additional
procedures, minimizing the number of biopsies taken and, in some cases,
permitting the physician to combine a diagnostic and therapeutic procedure in
one visit.
The Virtual Biopsy(TM) System is composed of three components:
* a console which houses the laser, spectrophotometer, and a computer
* a virtual biopsy forceps which incorporates an optical probe that
transmits and collects light energy when connected to the console,
and
* a proprietary tissue recognition algorithm software that manages
system operations and provides data analysis and interpretation of
the collected data.
The Virtual Biopsy(TM) System operates by transmitting low level
monochromatic light from the console through the optical fiber and thereby
directly to the tissue being analyzed. The tissue in contact with the optical
fiber absorbs the light, and the resulting tissue autofluorescence is collected
by the same optical fiber and transmitted back to a spectrophotometer within the
console for analysis. The result of the analysis is then immediately displayed
on the monitor for the endoscopist's use in making his or her interpretation.
The console consists of a graphic user interface, a computer, a
spectrophotometer, a laser light source and a power supply, all of which are
incorporated into a mobile rack system on lockable wheels for safe and easy
movement and setup. The software includes diagnostic modules that check the
system for intrinsic faults or errors that could affect system
25
<PAGE>
performance or results. The modules provide the user with specific information
allowing him or her to either resolve the problem or contact SPECTRASCIENCE for
support and service. The proprietary forceps component, which can be reusable or
disposable, is essentially a standard non-electrical biopsy forceps. The forceps
includes a central lumen that allows the optical fiber to be more easily
positioned during the procedure and makes it more convenient to collect physical
biopsy specimens. The optical fiber, when connected to the forceps, serves as an
optical conduit between the console and the tissue being examined. The forceps
affords the endoscopist the added capability to collect a physical biopsy or do
a complete polyp removal without having to remove the optical fiber and replace
it with a standard biopsy forceps.
ADVANTAGES OF THE VIRTUAL BIOPSY(TM) SYSTEM
We believe that the Virtual Biopsy(TM) System offers significant
advantages over currently available methods to diagnose and facilitate the
treatment of colorectal cancer. Specific advantages include:
* REDUCTION OF OPPORTUNITY FOR ERROR -- Traditional tissue biopsies
involve subjective visual determination by the endoscopist of which
tissues to biopsy, and the submission of that tissue sample to a
pathology laboratory for analysis. This process introduces the risks
of human error in obtaining viable or appropriate tissue samples,
determining which tissues to biopsy, accurately reading the
pathology slides and potential mislabeling or mishandling of the
tissue samples as they are transferred to the external pathology
laboratory. In contrast, the Virtual Biopsy(TM)System can assist the
physician in determining in real time during the endoscopic
procedure, which tissues are normal as opposed to potentially
cancerous or cancerous, thereby reducing the number of tissues to be
biopsied and reducing the human error in selection of such tissues.
* SIGNIFICANTLY INCREASES THE ENDOSCOPIST'S DIAGNOSTIC ACCURACY -- We
believe that the results of our clinical trials demonstrated that
the use of the Virtual Biopsy(TM) System significantly increased the
endoscopist's diagnostic accuracy in correctly identifying normal,
as opposed to pre-cancerous or cancerous polyps. Our clinical trials
revealed the diagnostic accuracy of endoscopists in correctly
identifying pre-cancerous or cancerous polyps, through traditional
methods, to be approximately 83%. Clinical use of the Virtual
Biopsy(TM) System increased the diagnostic accuracy of the
endoscopist to differentiate pre-cancerous or cancerous polyps to
96.3%.
* REAL-TIME FEEDBACK -- The results of traditional tissue biopsies may
not be available for several days or even weeks following the biopsy
procedure, whereas the Virtual Biopsy(TM) System offers real-time
feedback to treating physicians and patients. This also enables the
physician to appropriately select an immediate best course of
treatment for the patient without rescheduling the patient.
* REDUCTION OF REDUNDANT PROCEDURES -- The ability to receive
immediate diagnostic confirmation as to whether the tissue is
normal, as opposed to pre-cancerous or cancerous, through use of the
Virtual Biopsy(TM) System, can enable the physician to diagnose and
treat the patient appropriately without the need to reschedule a
second appointment or procedure. Use of the Virtual Biopsy(TM)
System can enable the endoscopist to combine a diagnostic and
therapeutic procedure in one visit, with the same instrument and
without the need to wait for the pathologist's report.
* EASE OF USE -- The Virtual Biopsy(TM) System is designed to be
familiar and easy to use by physicians. Because the Virtual
Biopsy(TM) System forceps are virtually identical to traditional
biopsy forceps used by endoscopists, we believe that physicians who
have previously performed traditional tissue biopsies and
polypectomies can be easily trained to use our system. Additionally,
results of the real-time optical analysis are displayed such that no
special interpretive skills are necessary.
* COST EFFECTIVENESS -- The Virtual Biopsy(TM) System offers a less
costly alternative to current endoscopic colon cancer screening
methods because it may reduce the number of excisional biopsy
procedures and additional colonoscopy procedures performed per
patient. This will minimize the cost per patient while maximizing
the efficiency of the endoscopist's time. Better patient outcomes by
earlier detection and treatment will result in saved lives and
dollars.
* LIKELIHOOD OF PATIENT ACCEPTANCE -- We believe the idea that a
revolutionary colon cancer screening
26
<PAGE>
technique is available, using "cool laser light" to provide a
"virtual biopsy," will be embraced and quickly gain acceptance by
the two million people being screened by flexible sigmoidoscopy in
the U.S. every year. This is a population of consumers that for the
most part are without any symptoms. They are simply "at risk"
because they are over 50 years old or have a family history of colon
cancer. These people are generally self-motivated to be screened and
will seek information and the most advanced techniques available.
DISTRIBUTION, MARKETING AND CUSTOMERS
At this time, we have limited marketing and sales capabilities. The
target market for the Virtual Biopsy(TM) System will be medical centers and
physicians. We plan to use strategic partners and a small in-house marketing and
business development group to commercialize our products. We plan to:
* focus our marketing efforts on major cancer and endoscopy centers in
the United States, and the leading premier endoscopists and other
physicians at those institutions;
* identify well-respected clinical supporters of the Virtual
Biopsy(TM) System and leverage their reputation in the clinical
community to generate demand for the Virtual Biopsy(TM) System; and
* conduct physician training seminars as necessary.
We intend to sell our products in the United States directly, and
outside the United States through international distributors and corporate
partners. We are currently exploring strategic partnerships and distributor
relationships with respect to marketing and distributing our products. In the
interim, we plan to do the initial pre-marketing, outcome-based clinic studies
and utilize high profile clinical partners to establish markets for our
products.
Management will seek potential strategic partners having strong market
niches in the field of gastrointestinal medicine. We believe distributing our
products through strategic partners:
* may be more cost-effective and less time-consuming than establishing
an in-house sales group in these areas;
* will allow us to capitalize on the marketing expertise of the
strategic partner; and
* enable us to leverage the market position of our products into other
market niches if the strategic partner has an established reputation
with prospective purchasers of diagnostic products and proven
selling, marketing and distribution capabilities.
SPECTRASCIENCE's objective is to become a leader in the development and
commercialization of advanced spectrophotometric diagnostic products with the
capability to differentiate in real time between healthy and pre-cancerous or
cancerous tissues. In order to accomplish this we will need to strengthen our
marketing capabilities and, pending FDA clearance to market for the Virtual
Biopsy(TM) System, we plan to focus our initial marketing efforts on the
following areas:
* BE "FIRST TO MARKET" WITH A VIRTUAL BIOPSY(TM) SYSTEM. We believe
that SPECTRASCIENCE will be the first to introduce and market an
endoscopic optical biopsy system for colorectal cancer screening
that will improve the endoscopist's diagnostic accuracy by providing
objective, real-time feedback as to the pathology of suspect tissue.
* DEMONSTRATE TO THIRD PARTY PAYORS (MEDICARE, BLUECROSS AND
BLUESHIELD ETC.) THE CLINICAL UTILITY AND EFFICACY OF THE VIRTUAL
BIOPSY(TM)SYSTEM. SPECTRASCIENCE intends to demonstrate to third
party payors through outcome-based clinical studies that the use of
the Virtual Biopsy(TM)System will improve patient outcomes through
earlier detection and decreased patient care costs. SPECTRASCIENCE
plans to demonstrate the clinical utility and efficacy of the
Virtual Biopsy(TM)System to key physician opinion leaders targeted
by management, including those practicing at major cancer centers
throughout the United States. We believe that successful
outcome-based trials demonstrating better clinical outcomes and the
acceptance of the Virtual Biopsy(TM)System by key opinion leaders in
the health care industry will be critical elements in gaining market
acceptance and third party reimbursement for the Virtual
Biopsy(TM)System.
* DEMONSTRATE TO PHYSICIANS AND OTHER HEALTH CARE PROVIDERS THE EASE
OF USE OF THE VIRTUAL BIOPSY(TM)SYSTEM. SPECTRASCIENCE intends to
demonstrate to endoscopists and other health care providers that the
Virtual
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Biopsy(TM)System employs familiar medical technology and equipment,
such as the forceps, that are virtually identical to those currently
used by endoscopists in performing traditional tissue biopsies. The
Virtual Biopsy(TM)System does not require any special interpretive
skills to obtain results. We believe that demonstration of the ease
of use of the Virtual Biopsy(TM)System, together with demonstration
of better clinical outcomes, will aid in gaining market acceptance
of the Virtual Biopsy(TM) System. Training seminars will be
conducted as necessary to educate endoscopists and other health care
providers regarding the proper use of the Virtual Biopsy(TM)System.
* SEEK TO ESTABLISH STRONG SALES DISTRIBUTION. SPECTRASCIENCE will
seek out leading distributors in its target markets both
domestically and internationally. These distributors will typically
have significant resources and strong franchises which, when coupled
with our technology, will increase the likelihood of commercial
success. We will also develop an in-house sales and marketing staff
to manage and optimize our distribution networks, and to develop and
implement marketing strategies.
CLINICAL TRIALS
SPECTRASCIENCE conducted clinical studies using the Virtual Biopsy(TM)
System to aid endoscopists in the detection of colorectal cancer at three major
medical centers and one group practice:
* The Mayo Clinic in Rochester, Minnesota;
* Massachusetts General Hospital in Boston, Massachusetts;
* Hennepin County Medical Center in Minneapolis, Minnesota; and
* Minnesota Gastroenterology PA, which has 48 gastroenterologists
practicing at multiple sites in both Minneapolis and St. Paul,
Minnesota and surrounding areas
In April 1998, we had a meeting with the Gastroenterology/Urology
branch of the Food and Drug Administration ("FDA") prior to submitting our
Pre-Market Approval application, to review our Phase I data, clinical protocols
and clinical results collected on 306 patients during our multi-center clinical
trials with the Virtual Biopsy(TM) System. In this multi-center study, we
attempted to show that the Virtual Biopsy(TM) System is a valuable tool for use
during endoscopy of the colon to improve the ability of the endoscopist to
identify and distinguish between normal, and pre-cancerous or cancerous tissue
during a colon examination.
The initial results of our clinical study, which were presented to the
FDA, demonstrated that use of the Virtual Biopsy(TM) System improves the
diagnostic accuracy of the endoscopist in accurately detecting pre-cancerous and
cancerous polyps. The FDA requested that we obtain additional patient data to
demonstrate the reproducibility of the algorithm's accuracy prior to filing our
Pre-Market Approval application. The collection of this additional patient data
was completed and we proceeded to submit our modular approach Pre-Market
Approval application in September 1998.
The Gastroenterology and Urology Devices Panel of the Medical Devices
Advisory Committee for the FDA reviewed our Pre-Market Approval submission for
the Virtual Biopsy(TM) System on November 19, 1999. The role of the panel
regarding our Pre-Market Approval submission was to provide a recommendation to
the agency on FDA regulatory issues pertaining to the submission. All aspects of
our Pre-Market Approval submission were discussed by the panel, which was
composed of several physician specialists in Gastroenterology, Urology, and
Surgery as well as non-voting representatives from Nursing and Industry. After a
full day meeting, the panel voted to recommend FDA clearance for SPECTRASCIENCE
to market its Virtual Biopsy(TM) System for use in colonoscopy and
flexible-sigmoidoscopy. The recommendation included a post-approval study that
SPECTRASCIENCE had already planned to conduct to secure third party
reimbursement.
In February 2000, the FDA requested that management address queries
raised by their advisory panel and the Office of Device Evaluation's reviewing
staff regarding the pre-market approval application. The queries were to be
addressed by re-analyzing our statistical results to ensure the Virtual
Biopsy(TM) System can be appropriately labeled. As of the date of this
prospectus, we have responded to the request by the FDA regarding labeling and
further data analysis. At present, a final approval is still necessary before we
can commercialize the Virtual Biopsy(TM) System. We expect our application to
receive final FDA approval in 2000 with a requirement by the FDA to conduct a
post-approval clinical study using the Virtual Biopsy(TM) System as an adjunct
tool during flexible sigmoidoscopies. It is still possible however, that the FDA
could request additional clinical data or otherwise disapprove our application,
requiring us to start over.
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We are also conducting a multi-center clinical feasibility trial for
the detection of esophageal cancer at the Mayo Clinic and the University of
California at San Francisco (UCSF). In general, Barrett's esophagus is a known
risk factor for esophageal cancer. This clinical trial is designed to determine
the viability of using spectroscopic techniques to detect esophageal cancer in
Barrett's patients, and to develop and demonstrate the feasibility of the
Virtual Biopsy(TM) System. We plan to expand these clinical trials in 2000.
COMPETITION
The medical device industry is highly competitive. We believe we have
few direct competitors in applying spectroscopy for the differentiation of
normal and cancerous tissues in the colon; however, the development of products
using spectroscopic diagnostics for various medical specialties is growing
rapidly. To the best of our knowledge, no other competitors have completed FDA
clinical studies or submitted a pre-market approval application to the FDA for
the detection of colorectal cancer. The companies that are listed below have
developed or are in the process of developing products that use spectroscopic
technology that could potentially compete with our products or technologies.
* Xillix Technologies (Richmond, British Columbia, Canada) has an
approved product for detection of cancer in the lungs, the LIFE-Lung
system, which it began to commercialize in 1998. This product uses
light-based spectroscopy to detect and localize lung cancer and
costs approximately $200,000 per system. Xillix was also developing
the LIFE-GI system to detect gastrointestinal cancers of the
esophagus, stomach, intestines and colon. Under the terms of an
agreement, Olympus Optical Co. of Japan agreed to help finance
Xillix's development work in exchange for rights to market the
LIFE-Lung and LIFE-GI systems worldwide. The LIFE-GI system was
about to enter the final stages of clinical testing when Xillix
filed charges against Olympus. The charges state that Olympus
obtained trade secrets from Xillix and used the trade secrets for
their own benefit. As a result, Xillix has suspended development and
distribution of its products and in order to conserve capital for
prosecution of its claims, Xillix permanently laid-off 80% of its
work force in August 1999. Xillix's legal advisors believe the
arbitration proceedings will be completed before the end of 2000.
* SpectRx (Norcross, GA) is focused on the development and manufacture
of painless and bloodless spectrophotometry based alternatives to
currently available medical diagnostic and monitoring procedures.
Their first fully developed product, BiliCheck, is for the
monitoring of infant jaundice and began to be commercialized in
1999. They are developing other spectroscopy systems that offer less
invasive and painless alternatives to blood tests currently used for
glucose monitoring, and diabetes screening which are in various
stages of development. In December 1999, they expanded their
agreement with Abbott Laboratories to include joint development of a
continuous glucose monitor for diabetes. Under the terms of the
expanded agreement, Abbott, in exchange for a $5.25 million equity
investment, has exclusive worldwide marketing rights to continuous
monitoring as well as single-use monitoring applications of the
technology. SpectRx is also developing non-invasive cervical and
skin cancer detection systems in partnership with Welch Allyn.
FluorRx, a sister company to SpectRx, is also developing
spectroscopy systems for other clinical chemistry diagnostics.
* MediSpectra, Inc. (Lexington, MA) has been focused on developing a
system that improves on the current standards for cervical cancer
detection. The system they are developing is an in-vivo, non-contact
device that simultaneously uses UV fluorescence and white light to
scan the cervix in a single measurement. It then uses the
measurement to localize sites for biopsy, the goal being to detect
high-grade precursors to cervical cancer. In November 1999,
MediSpectra announced that preliminary data they collected using
their second generation research device, correctly identified
pre-cancerous cervical lesions with an accuracy superior to the
current diagnostic standard of care. They plan to initiate clinical
studies in mid-2000.
* Mediscience Technology (Cherry Hill, New Jersey) has conducted
feasibility clinical studies for oral leukopakia, a pre-cancerous
condition of the mouth, with a prototype product called CD SCAN.
They also plan to conduct clinical studies in the areas of breast
cancer and Barrett's esophagus with products using spectroscopic
technology.
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* Lasertec International, Inc. (Stamford, Connecticut) expects to have
results from ongoing human trials of its Photo Therapic Resonancy
System in several months. Their technology is currently focused on
the diagnosis and treatment of bladder cancer, but they plan to
expand their technology to the diagnosis of laryngeal cancer. Their
product differs from other cancer diagnostic products because it is
designed to eliminate the cancer by causing the cancer cell to
destroy itself.
* Lifespex (Kirkland, Washington) is a development stage company that
has successfully completed feasibility clinical studies with its
cervical cancer detection device called CERVISCAN. Lifespex is also
conducting initial testing for its skin cancer detection device.
* Polartechnics, Inc (Sidney, Australia) is developing a tissue
auto-fluorescence probe for cervical cancer detection called the
TruScan. The company has initiated clinical trials in Europe for the
detection of cervical cancer. Polartechnics has a strategic alliance
with Ethicon, a wholly owned subsidiary of Johnson & Johnson, under
which Polartechnics could receive up to $18 million in the form of
milestone payments, and Ethicon has certain distribution and
marketing rights for the TruScan. Polartechnics has received several
milestone payments. Additionally, on February 2, 2000 Polartechnics
announced a successful placement of its shares, raising $13.2
million, which they plan to use to accelerate commercialization of
the TruScan. The company has obtained ISO 9001 Certification and
projects a 2000 European launch for TruScan. Polartechnics' second
product, SkinPolarprobe, a melanoma detection device, has been
placed in clinics in Australia for testing and development.
Polartechnics plans to expand placement of the Skin Polarprobe to
clinics in the U.S. in 2000.
Many of these companies have substantially greater resources than we
do, either internally or in combination with strategic partners. These resources
may allow them to develop, market and distribute technologies or products that
could be more effective than those developed or marketed by us, or that would
render our technologies and products obsolete. The resource advantages they may
have are:
* greater capital resources * greater resources and expertise
* greater manufacturing resources in the areas of research and
* greater resources and expertise development
in testing products in clinical * greater expertise in obtaining
trials regulatory approvals
* greater resources for marketing
and sales activities
MANUFACTURING
To date, SPECTRASCIENCE has not yet commercialized any of its products.
Our manufacturing activities have consisted of assembling a limited number of
Virtual Biopsy(TM) Systems for use in pre-clinical and clinical trials, and for
ISO certification. We do not have experience in manufacturing our products in
commercial quantities or with the yields that will be necessary for us to
achieve significant commercial sales. Currently, we complete the assembly of the
Virtual Biopsy(TM) System console in-house. The software is developed in-house
in conjunction with outside consultants, and the forceps are produced by a
leading, U.S. contract manufacturer of medical forceps. We assemble the
components, many of which are widely available, and inspect and test the
completed systems at our facilities.
Our Virtual Biopsy(TM) System will have to be manufactured in
accordance with current Quality System Regulations requirements in order for us
to sell our products in the U.S., and ISO 9001 standards in order for us to sell
our products in the European Union. These requirements impose certain procedural
and documentation requirements upon us with respect to manufacturing and quality
assurance activities, as well as upon those third parties with whom we contract
to perform certain manufacturing processes.
Many of the raw materials or components used in the manufacture of our
products are "off the shelf" items and are available from more than one vendor.
We do have certain components needed for the manufacture of our product, such as
the laser light source, spectrophotometer and Optical Biopsy Forceps, which are
available only from single or limited source suppliers. The process of
qualifying additional or replacement vendors for certain components or services
can be time-consuming and expensive, especially in the medical device industry.
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We currently have an agreement with a leading contract manufacturer of
medical forceps in the United States, under which they have agreed to supply us
with the quantities of forceps that we require. This agreement expires no
earlier than March 2003 but may be renewed by the contract manufacturer for an
additional two years upon six months' notice. Even though the performance of the
suppliers of the forceps and other components and raw materials has generally
been satisfactory, they may not continue to perform up to our standards, meet
government regulations or handle labor unrest, if any.
PATENTS AND PROPRIETARY RIGHTS
Our ability to obtain and maintain patent protection for our products,
preserve our trade secrets and operate without infringing on the proprietary
rights of others will directly affect how successful our operations will be.
There are certain technological aspects of our products that are not covered by
any patents or patent applications. Our strategy regarding the protection of our
proprietary rights and innovations is to seek patents on those portions of our
technology that we believe are patentable, and to protect as trade secrets other
confidential information and proprietary know-how. We seek to protect our trade
secrets and proprietary know-how by obtaining confidentiality and invention
assignment agreements in connection with employment, consulting and advisory
relationships.
We currently own exclusive rights to a total of six issued, allowed and
pending U.S. patents and applications, and four pending international patent
applications. SPECTRASCIENCE has two issued U.S. patents, one which is entitled
"Optical Biopsy Forceps" (U.S. Patent 5,763,424) and the other which is entitled
"Optical Biopsy Forceps System and Method of Diagnosing Tissue" (U.S. Patent
6,066,102), two related allowed and one related pending U.S. patent
applications. SPECTRASCIENCE is the exclusive licensee through The Massachusetts
General Hospital of U.S. Patent 5,843,000 entitled "Optical Biopsy Forceps and
Method of Diagnosing Tissue" and a pending international patent application. The
patents expire between November 2012 and May 2016. The issued patent and pending
patent applications are focused on types of forceps having an optical fiber and
biopsy jaws which are positioned to take samples for biopsy from the precise
area of view of the optical fiber, methods of tissue diagnosis using these
forceps, and the Virtual Biopsy(TM) System. Each of the international
applications designates twenty countries for patent protection.
In addition to the patents and patent applications described above,
SPECTRASCIENCE has a licensing arrangement with Massachusetts General Hospital's
Wellman Laboratories of Photomedicine. The arrangement provides that certain
patents that result from the Wellman Lab's research on cancer detection will be
licensed exclusively to us. The Massachusetts General Hospital license is
exclusive through the life of the licensed patents, subject to customary
diligence requirements for commercially reasonable best efforts to introduce
products in the United States, Europe and Japan within three years, or such
revised period as may reasonably be needed due to technical difficulties or
delays in clinical studies or regulatory processes. SPECTRASCIENCE has also
signed an exclusive license agreement with Advance Photodynamic Technologies,
Dr. Merrill Biel, for the rights to certain proprietary spectrophotometric
technology.
The patent and trade secret positions of medical device companies like
SPECTRASCIENCE, are uncertain and involve complex and evolving legal and factual
questions. To date, no claims have been brought against SPECTRASCIENCE alleging
that our technology or products infringe intellectual property rights of others.
Often, patent and intellectual property disputes in the medical device industry
are settled through licensing or similar arrangements. However, there can be no
assurance that necessary licenses from other parties would be available to us on
satisfactory terms, if at all. The costs associated with such arrangements may
be substantial and could include ongoing royalties.
United States patent applications are secret until patents are issued
or corresponding foreign applications are published in other countries. Since
publication of discoveries in the scientific or patent literature often lags
behind actual discoveries, we cannot be certain that SPECTRASCIENCE was the
first to invent the inventions covered by each of its pending patent
applications, or that it was the first to file patent applications for such
inventions. In addition, the laws of some foreign countries do not provide the
same degree of intellectual property right protection as do the laws of the
United States. Litigation associated with patent or intellectual property
infringement or protection can be lengthy and prohibitively costly. There can be
no assurance that SPECTRASCIENCE would have the financial resources to defend
its patents from infringement or claims of invalidity; or to successfully defend
itself against intellectual property infringement claims by third parties.
GOVERNMENT REGULATION
UNITED STATES
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Extensive government regulation, both in the United States and
internationally, controls the design, manufacture, labeling, distribution and
marketing of our products, particularly regarding product safety and
effectiveness. In the United States, medical devices are subject to review and
clearance by the FDA. The FDA regulates the clinical testing, manufacture,
labeling, distribution and promotion of medical devices.
The Food, Drug, and Cosmetic Act, the Public Health Service Act, the
Safe Medical Devices Act of 1990 and other federal statutes and regulations also
govern or influence the testing, manufacture, safety, labeling, storage,
recordkeeping, clearance, advertising and promotion of such products.
If we fail to comply with applicable requirements we could face:
* fines, injunctions, or civil * total or partial suspension of
penalties production
* recall or seizure of our products * inability to obtain pre-market
* criminal prosecution clearance/approval for our
* a recommendation that we not be devices
allowed to contract with the * withdrawal of marketing
government approvals
In the United States, medical devices are assigned to one of three
classes depending on the controls the FDA deems necessary to ensure the safety
and effectiveness of the device. The Virtual Biopsy(TM) System is a Class III
device. In addition to adhering to general controls to which all medical devices
are subject, a Class III device must receive pre-marketing approval to ensure
its safety and effectiveness prior to commercialization.
FDA approval to distribute a new device can be obtained in one of two
ways. If a new or significantly modified device is "substantially equivalent" to
an existing legally marketed device, the new device can be commercially
introduced after filing a 510(k) pre-market notification with the FDA and the
subsequent issuance by the FDA of an order permitting commercial distribution.
Changes to existing devices that do not significantly affect safety or
effectiveness may be made without an additional 510(k) notification. The Company
received 510(k) clearance from the FDA for its disposable and reusable Optical
Biopsy Forceps in December 1996.
A second, more comprehensive approval process applies to a Class III
device that is not substantially equivalent to an existing product. First, the
applicant must conduct clinical trials in compliance with testing protocols
approved by the Institutional Review Board at each participating research
institution. These boards oversee and approve all clinical studies at their
institutions. Second, a pre-market approval application must be submitted to the
FDA describing:
* the clinical trial results * the device and its components
* the methods, facilities and * proposed labeling
controls used for manufacture * the demonstration that the product
of the device is safe and effective
Finally, the manufacturing site for the product subject to the pre-market
approval must pass an FDA pre-approval inspection.
A pre-market approval application, also referred to as a PMA
application, must be supported by valid scientific evidence to demonstrate
safety and efficacy of the device, and, if applicable, must contain:
* results of all relevant bench * laboratory and animal
tests studies
* pre-clinical and human clinical * a complete description of
trial data the device and its components
* a detailed description of the * proposed labeling
methods, facilities and controls * advertising literature
used to manufacture the device
* training methods, if required
Certain devices require an Investigation Device Exemption application
to be filed. The Virtual Biopsy(TM) System is considered a "non-significant
risk" device and therefore does not require an IDE application.
If the FDA determines, upon receipt of the pre-market approval
application, that the application is sufficiently complete to permit a
substantive review, they will accept the application for filing. They then begin
an in-depth review of the application. This review typically can take from six
months to two years from the date the application is accepted for filing; but
could be significantly longer. The review time is often significantly extended
due to the FDA asking for more information or clarification of information
previously submitted. During the review period, a panel primarily composed of
clinicians and acting as an
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advisory committee, will likely be convened to review and evaluate the
application. The panel will provide recommendations to the FDA as to whether the
device should be approved; but the FDA is not bound by those recommendations.
Toward the end of the application review process, the FDA generally will conduct
an inspection of the manufacturer's facilities to ensure that the facilities are
in compliance with the applicable Quality System Regulations requirements.
The FDA has attempted to streamline the pre-market approval review
process to increase efficiency and effectiveness by adopting a "modular approach
to PMA review." The essence of this relatively new modular approach is to break
the contents of a pre-market approval application into well-delineated
components, and to have reports of each component submitted as soon as the
applicant has performed the testing and analysis. The application is viewed as a
compilation of sections, or "modules," that together become a complete
application. The FDA assigns a stable team to the project and reviews each
module report as soon as it is received, building a complete record of review.
This process allows more rapid closure when the last components are submitted
because much of the work will already have been completed. The final modules
submitted will usually consist of a final clinical data report, revised proposed
labeling and a draft Summary of Safety and Effectiveness Data. In general, final
manufacturing information and notice of an inspection-ready facility is
acceptable as a "late" module so long as it arrives within 90 days of the
complete pre-market approval application filing.
If FDA evaluations of both the pre-market approval application and the
manufacturing facilities are favorable, the FDA will issue either an approval
letter or a conditional approval letter which contains a number of conditions
that must be satisfied in order to secure final approval of the pre-market
approval application. When and if those conditions are fulfilled to the
satisfaction of the FDA, they will issue a pre-market approval letter,
authorizing commercial marketing of the device for certain indications. If the
FDA's evaluation of the pre-market approval application or manufacturing
facilities is not favorable, the FDA will deny approval of the application or
issue a "not approvable letter." The FDA may also determine that additional
clinical trials are necessary, in which case pre-market approval could be
delayed for several years while additional clinical trials are conducted and
submitted in an amendment to the pre-market approval application. The pre-market
approval process can be expensive, uncertain and lengthy, and a number of
devices for which FDA approval has been sought by other companies have never
been approved for marketing.
In April 1998, SPECTRASCIENCE had a pre-submission meeting with the
Gastroenterology/Urology branch of the FDA to review data, clinical protocols
and clinical results collected during its multi-center clinical trials using the
Virtual Biopsy(TM) System. The clinical study design and statistical methods
were considered "appropriate" by the FDA, but they requested we obtain
additional patient data to demonstrate the reproducibility of the algorithm's
accuracy prior to filing our pre-market approval application. We obtained this
additional patient data and subsequently received FDA approval to submit our
pre-market approval application through the FDA's modular approach to pre-market
approval review in September 1998. SPECTRASCIENCE submitted modules in support
of its pre-market approval filing beginning in September 1998. On November 19,
1999, the Gastroenterology and Urology Devices Panel of the Medical Devices
Advisory Committee for the FDA reviewed our submission for the Virtual
Biopsy(TM) System. All aspects of the submission were discussed by the panel,
which was composed of several physician specialists in Gastroenterology,
Urology, and Surgery as well as non-voting representatives from Nursing and
Industry. After a full day meeting, the panel voted to recommend FDA clearance
for SPECTRASCIENCE to market its Virtual Biopsy(TM) System for use in
colonoscopy and flexible-sigmoidoscopy. The recommendation included a
post-approval study. In February 2000, the FDA requested us to address queries
raised by the advisory panel and the Office of Device Evaluation's reviewing
staff regarding our application. The queries were to be addressed by
re-analyzing our statistical results to ensure the Virtual Biopsy(TM) System
could be appropriately labeled. As of the date of this prospectus, we have
responded to the request by the FDA regarding labeling and further data
analysis. At present, we are awaiting final FDA determination and final
clearance to market for the Virtual Biopsy(TM) System. Management anticipates
that SPECTRASCIENCE will obtain FDA approval of its pre-market approval
application in 2000. There can be no assurance that the application will be
approved by the FDA or that the FDA will not request additional data or
otherwise require us to conduct further clinical trials, thereby causing
SPECTRASCIENCE additional delay and expense.
Any products manufactured or distributed pursuant to FDA clearances or
approvals, are subject to pervasive and continuing regulation by the FDA,
including record-keeping requirements and reporting of adverse experiences when
using the product. Device manufacturers are required to register their
establishments and list their devices with the FDA and certain state agencies,
and are subject to periodic inspections by the FDA and certain state agencies.
The Food Drug and Cosmetic Act requires devices to be manufactured in accordance
with Quality System Requirements regulations, which impose procedural and
documentation requirements upon a manufacturer and any of its contract
manufacturers with respect to manufacturing and quality assurance activities.
Quality System Requirements regulations also require design controls and
maintenance of service records. Changes in existing requirements or adoption of
new requirements or policies could adversely affect our ability to comply with
regulatory requirements. Failure to comply with
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regulatory requirements could have a material adverse effect on the Company's
business, financial condition or results of operations.
SPECTRASCIENCE is also subject to numerous federal, state and local
laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control and disposal of
hazardous or potentially hazardous substances. SPECTRASCIENCE will be subject to
additional federal, state and local environmental laws when commercial
development and production of the Virtual Biopsy(TM) System begins. We are not
aware of any manufacturing methods for the Virtual Biopsy(TM) System that will
require extensive or costly compliance with environmental regulations. However,
since laws change over time there can be no assurance that SPECTRASCIENCE will
not be required to incur significant costs to comply with all applicable laws
and regulations in the future, or that the impact of changes in those laws or
regulations or adoption of new laws and regulations will not have a material
adverse effect upon SPECTRASCIENCE's ability to do business.
EUROPEAN UNION AND OTHER COUNTRIES
The primary regulatory environment in Europe is that of the European
Union. The European Union consists of 15 countries encompassing most of the
major countries in Europe, including SPECTRASCIENCE's principal anticipated
international markets. The European Union has adopted numerous directives and
standards regulating the design, manufacture, clinical trial, labeling, and
adverse event reporting for medical devices. The principal directive prescribing
the laws and regulations pertaining to medical devices in the European Union is
the Medical Devices Directive, 93/42/EEC.
Devices that comply with the requirements of the Medical Devices
Directive will be entitled to bear the CE mark, indicating that the device
complies with the essential requirements of the applicable directive. In order
to sell a medical device in the European Union, the product must have the CE
mark. Generally, companies receive ISO certification and then obtain the CE
mark. SPECTRASCIENCE is currently seeking ISO 9001 certification and CE marks
for the Virtual Biopsy(TM) System. As of the date of this prospectus
SpectraScience successfully completed a final audit necessary to receive ISO
9001 Certification. A CE Mark application will be filed shortly following ISO
Certification. We expect to have secured the necessary approvals to make sales
in the European Union in the year 2000. There can be no assurance that we will
receive ISO certification or a CE mark for any of our products or product
components in a timely manner or at all. Furthermore, even though a device bears
the CE Mark, practical complications have arisen with respect to market
introduction because of differences among countries in areas such as labeling
requirements. SPECTRASCIENCE may be required to spend significant amounts of
capital in order to comply with the various regulatory requirements of foreign
countries.
THIRD PARTY REIMBURSEMENT
In connection with the Balanced Budget Act of 1997, Congress approved
regular colorectal cancer screening tests for the 37.3 million Americans covered
by Medicare. Medicare now covers, for individuals over the age of 50, annual
fecal occult blood tests, screening flexible sigmoidoscopies every three to five
years and colonoscopies for high-risk individuals every two years. An estimated
80-90 million Americans are considered at-risk because they are over 50 years
old, have a family history of colorectal cancer, or have a personal history of
polyps or inflammatory bowel disease. Management believes that this increase in
Medicare reimbursement for colorectal cancer screening will increase the
incidence of flexible sigmoidoscopies and enhance the market opportunity for the
Virtual Biopsy(TM) System.
We plan to market and sell the Virtual Biopsy(TM) System 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 Virtual
Biopsy(TM) System and other proposed products will be substantially dependent on
the availability of adequate reimbursement from these third party payors for
procedures carried out using our products. Regardless of the type of
reimbursement system, we believe that physician advocacy of our products will be
required to obtain reimbursement. We believe that less invasive procedures
generally provide less costly overall therapies as compared to conventional
drugs, surgery and other treatments. We anticipate that hospital administrators
and physicians would justify the use of our products by the cost and time
savings recognized, and clinical benefits that we believe would be derived from
the use of our products.
Third party payors determine whether to provide coverage for a
particular procedure and reimburse health care providers for medical treatment
at a fixed rate based on the diagnosis-related group established by the United
States Health
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Care Financing Administration. The fixed rate of reimbursement is based on the
procedure performed and is unrelated to the specific type or number of devices
used in a procedure. If a procedure is not covered by a diagnosis-related group,
payors may deny reimbursement. If reimbursement for a particular procedure is
approved, third party payors will reimburse health care providers for medical
treatment based on a variety of methods, including a lump sum prospective
payment system based on a diagnosis-related group or per diem, a blend between
the health care provider's reported costs and a fee schedule, a payment for all
or a portion of charges deemed reasonable and customary, or a negotiated per
capita fixed payment.
Virtual biopsies are not currently approved for reimbursement by
third-party payors, and there can be no assurance that the Virtual Biopsy(TM)
System will be approved for any third party reimbursement, even if it proves to
play a significant role in improving the endoscopist's ability to accurately
differentiate among polyps in the colon, thereby leading to early detection and
subsequent treatment of colorectal cancer. However, diagnosis-related group
reimbursement for endoscopic procedures such as flexible sigmoidoscopy,
colonoscopy and polypectomy, including fees for biopsies, has been established.
Medical equipment capital costs incurred by hospitals are reimbursed
separately from diagnosis-related group payments. Changes in federal
legislation, or policies of the government or third-party payors that reduce
reimbursements under capital cost pass through systems, could adversely affect
the market for our products.
Funding for Medicare and Medicaid is subject to limits set by Congress.
In 1997, as part of the Balance Budget Act of 1997, Congress approved Medicare
coverage for preventive colorectal cancer screening tests. Because studies have
shown that colorectal cancer screening can prevent 20%-40% of potential
colorectal cancers and 30%-50% of colorectal cancer deaths, we believe that such
funding should lead to:
* greater awareness of colorectal cancer among the general population,
* larger budgets for screening,
* higher reimbursement levels, and
* the potential establishment of new reimbursement codes for new
technologies like the Virtual Biopsy(TM) System. This does not
however, provide any assurances that the increased funding will lead
to third party reimbursement for the Virtual Biopsy(TM) System.
We expect that there will be continued pressure on cost-containment
throughout the United States health care system. Cost reduction, cost
containment, managed care, capitation pricing (pricing based on a fixed price
per procedure, rather than on the number of disposable products or hospital
supplies used), and consignment sales are becoming more and more common, not
only in the United States but also in many European countries and Japan. Limits
on third-party reimbursements that lead to cuts in reimbursements for new or
experimental procedures would affect the ability of smaller companies with new
technologies, to compete with larger established firms.
Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals must be
obtained on a country-by-country basis. Many international markets have
government managed health care systems that control reimbursement for new
products and procedures. In most markets, there are private insurance systems as
well as government managed systems. Market acceptance of SPECTRASCIENCE's
products will depend on the availability and level of reimbursement in
international markets we target. There can be no assurance that the Company will
obtain reimbursement in any country within a particular time, for a particular
time, for a particular amount, or at all.
We are unable to predict what additional legislation or regulation
relating to the health care industry or third-party coverage and reimbursement
may be enacted in the future, if any, or what effect it might have on us.
Reforms may include:
* mandated basic health care * greater reliance on prospective
benefits payment systems
* controls on health care spending * the creation of large insurance
through limitations on the growth purchasing groups
of private health insurance * fundamental changes to the
premiums and Medicare and health care delivery system
Medicaid spending
Management 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, we cannot predict which
reform proposals, if any, will be adopted, when they may be adopted or what
impact they may have on SPECTRASCIENCE. Failure by hospitals and other users of
our products to obtain reimbursement from third-party payors, or changes in
government and private third-party payors' policies toward reimbursement for
procedures employing our products, could have a material adverse effect on our
business, financial condition and results of operations.
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PRODUCT LIABILITY AND INSURANCE
The development, manufacture and sale of medical products and devices
entail significant risk of product liability and product failure claims. We face
an inherent business risk of financial exposure to product liability claims in
the event that the use of our products results in personal injury or death.
Clinical trials or marketing of any of our products may expose us to liability
claims resulting from the use of such products. SPECTRASCIENCE has conducted
only limited clinical trials and does not yet have, and will not have for a
number of years, significant clinical data to allow us to measure the risk of
product liability claims with respect to its products. SPECTRASCIENCE also faces
the possibility that defects in the design or manufacture of its products might
necessitate a product recall. There can be no assurance SPECTRASCIENCE will not
experience losses due to product liability claims or recalls in the future, or
that any claims or recalls would not have a material adverse effect on our
business, financial condition and results of operations. Even if a product
liability claim is unsuccessful, the time and expense of defending ourselves may
adversely affect our business, financial condition and results of operations. We
currently maintain a product liability insurance policy with an aggregate and
per occurrence limit of $2,000,000. There can be no assurance that the coverage
limits of our insurance policies will be adequate to protect us against claims
that might be brought against us. An inability to maintain insurance under terms
acceptable to SPECTRASCIENCE could prevent or inhibit clinical testing of or
commercialization of products we develop.
EMPLOYEES
As of June 30, 2000, SPECTRASCIENCE had 12 full-time employees, nine of
whom were engaged in product engineering design and development, manufacturing,
and regulatory affairs, and three of whom were engaged in sales and marketing,
and finance and administration. SPECTRASCIENCE is not subject to any collective
bargaining agreement and management believes that employee relations are
generally satisfactory.
SPECTRASCIENCE relies heavily on external consultants in the financial,
regulatory, software development and design engineering areas. We have been
successful in attracting and retaining qualified technical personnel. There can
be no assurance, however, that we will be able to continue to attract or retain
the skilled employees we require for profitable operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
PLAN OF OPERATION
For the past three years SPECTRASCIENCE has been focused on the design,
development, clinical testing, and regulatory approval of the Virtual Biopsy(TM)
System as an adjunctive tool during endoscopy of the colon. As discussed in the
clinical trials section, we are currently awaiting final determination of the
FDA regarding our pre-market approval application, and final clearance to market
in the United States for the Virtual Biopsy(TM) System. During the next year
management intends to:
* conduct outcome-based clinical trials to collect clinical data to
support and establish reimbursement;
* develop relationships with key physicians;
* commercialize the Virtual Biopsy(TM) System after FDA approval is
received;
* establish manufacturing processes and/or relationships for our
products;
* obtain ISO 9001 certification and the CE mark for our products;
* conduct post approval studies if required by the FDA; and
* expand the applications for our products.
SPECTRASCIENCE raised $3.5 million through a December 1999 Private
Placement of its common stock. The cash position of SPECTRASCIENCE on March 31,
2000 was $4,477,138. Management believes this amount of cash is sufficient to
fund operations for at least the next fifteen months, based upon the current
business plan and projections, in light of anticipated costs and expenditures
and demand for our products. We believe we will be able to implement the above
strategies without the need to purchase or lease significant pieces of equipment
or additional plant space. We believe we will need to hire additional employees
in 2000 to support manufacturing after we receive FDA clearance to market for
the Virtual Biopsy(TM) System, as well as additional administrative and in-house
marketing and research and development personnel.
RESULTS OF OPERATIONS
The following discussion of SPECTRASCIENCE's financial condition and
results of operations should be read in conjunction with the Financial
Statements and the notes thereto included in this prospectus.
QUARTER ENDED MARCH 31, 2000 COMPARED TO QUARTER ENDED MARCH 31, 1999
REVENUE. We recorded no revenue for the quarters ended March 31, 2000
and 1999. We do not expect to begin generating revenue until after FDA clearance
has been obtained for the Virtual Biopsy(TM) System.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
quarter ended March 31, 2000 totaled $334,573 compared to $282,024 for the
quarter ended March 31, 1999. The increase of $52,549, or 18.6%, was primarily
due to higher salary, rent and travel expenses. The increased salary expense was
partially due to having an additional engineer on staff that was not an employee
during the first quarter of 1999. The higher rent expense is due to leasing a
larger facility compared to the facility we occupied during the first quarter of
1999, and the travel expenses were incurred to attend a meeting with the FDA.
These higher expenses were partially offset by lower consulting and legal fees
related to proprietary rights.
SELLING, GENERAL & ADMINISTRATIVE. Selling, general and administrative
expenses for the quarter ended March 31, 2000 totaled $242,518 compared to
$193,507 for the quarter ended March 31, 1999. The increase of $49,011, or 25.3%
was primarily due to increased salary, convention, and travel expenses. The
increased salary, convention and travel expenses are due to having a vice
president of sales and marketing on staff that was not with the company during
the same period in 1999, and his related marketing activities. The increased
expenses were partially offset by lower shareholder expenses and lower
consulting expenses.
INTEREST AND OTHER INCOME (EXPENSE). Interest and other income for the
quarter ended March 31, 2000 was $52,588 compared to $15,238 for the same period
in 1999. This represented an increase of $37,350 or 245.1%, and is attributable
to higher interest income. The higher interest income is due to higher cash
balances during the quarter ended March 31, 2000.
NET LOSSES. As a result of the above factors, we reported a net loss of
$524,503 for the quarter ended March 31,
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2000, compared to a net loss of $460,293 for the quarter ended March 31, 1999.
This represented an increase of $64,210, or 13.9%, and was primarily due to
increased salary and facilities expenses. The net loss was $.08 per share for
the quarter ended March 31, 2000, compared to a net loss of $.09 per share for
the same period in 1999. We anticipate that our net loss will increase at least
through fiscal year 2000 as we begin to commercialize the Virtual Biopsy(TM)
System, continue our research and development efforts to develop applications
for the Virtual Biopsy(TM) System in other medical specialties and investigate
other potential opportunities for our technologies.
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1998
REVENUE. We recorded no revenue for the years ended December 31, 1999
and 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
year ended December 31, 1999 totaled $1,356,986, compared to $1,719,171 for the
year ended December 31, 1998. This represented a decrease of $362,185, or 21.1%.
The lower costs can be primarily attributed to the fact that a majority of the
design and development costs of the Virtual Biopsy(TM) System were incurred in
1998, as well as a substantial portion of the related clinical trial expenses.
During 1999 the product was moved through the clinical trial phase towards the
production phase. This phase of our products' development is more labor
intensive than the initial design and development phase.
Therefore, our salary expense and tools and supplies expense was higher
in 1999, but was more than offset by lower expenses in the areas of consulting,
design engineering, purchased services and contract payments. We had
substantially lower legal expenses related to intellectual property filings, and
increased facilities expenses due to our relocation into a larger facility. We
had expenses related to an inventory revaluation in 1998 that we did not have in
1999. The inventory revaluation was due to the replacement of the SGS console
with second generation technology currently used in our Virtual Biopsy(TM)
System.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended December 31, 1999 totaled $794,221,
compared to $746,953 for the year ended December 31, 1998. This represented an
increase of $47,268, or 6.3%. The resignation of Mr. Chew, our former CFO, in
July 1998, coupled with the untimely death of Mr. McMahon, our former President
and CEO, in December 1998 required management to incur increased expenses in the
areas of financial management and investor relations consulting. The increased
consulting expenses were partially offset by lower salary expenses and lower
travel expenses. We had increased legal expenses due to fund raising activities
and our delisting from the Nasdaq SmallCap Market. We had increased shareholder
relations expenses due to our fund raising activities and increased costs for
our annual meeting.
INTEREST AND OTHER INCOME (EXPENSE). Interest and other income for the
year ended December 31, 1999 totaled ($28,626), compared to $51,982 for the year
ended December 31, 1998. This represented a decrease of $80,608, or 155.1%. We
had higher interest income due to higher cash balances throughout 1999 compared
to 1998. However, the interest income was completely offset by other expenses.
NET LOSSES. As a result of the above factors, we reported a net loss of
$2,179,833 for the year ended December 31, 1999, compared to a net loss of
$2,414,142 for the year ended December 31, 1998. This represented a decrease of
$234,309, or 9.7%, and was primarily due to decreased research and development
costs. The net loss was $.41 per share for the year ended December 31, 1999,
compared to a net loss of $.52 per share for the year ended December 31, 1998.
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1997
REVENUE. We recorded no revenue for the years ended December 31, 1998
and 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
year ended December 31, 1998 totaled $1,719,171, compared to $1,095,281 for the
year ended December 31, 1997. This represented an increase of $623,890, or
57.0%. The increase was primarily due to:
* increased salary expense related to the hiring of two additional
personnel during the first half of 1998,
* increased expenses related to the multi-center clinical trials on
the OBS for colorectal cancer and feasibility studies for esophageal
cancer,
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* an inventory revaluation associated with a change in product design,
* increased consulting and product testing expenses relating to the
submission of the Modular PMA application to the FDA, and
* increased design engineering expenses.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended December 31, 1998 totaled $746,953,
compared to $679,809 for the year ended December 31, 1997. This represented an
increase of $67,144, or 9.9%. This increase was primarily due to increased
investor relations expenses and legal expenses. We used the services of our
investor relations consultant for the entire year in 1998 compared to only four
months in 1997 to assist in the process of informing brokers and analysts
throughout the United States about the Company and its technologies. We also
incurred increased legal and other professional service expenses in connection
with the filing of a registration statement relating to a public offering of our
common stock, which was later discontinued due to unfavorable market conditions.
INTEREST AND OTHER INCOME. Interest and other income for the year ended
December 31, 1998 totaled $51,982, compared to $131,299 for the year ended
December 31, 1997. This represented a decrease of $79,317, or 60.4%, and was due
to lower average cash balances during 1998 compared to 1997.
NET LOSSES. As a result of the above factors, we reported a net loss of
$2,414,142 for the year ended December 31, 1998, compared to a net loss of
$1,643,791 for the year ended December 31, 1997. This represented an increase of
$770,351, or 46.9%, and was primarily due to increased research and development
costs and lower interest and other income. The net loss was $.52 per share for
the year ended December 31, 1998, compared to a net loss of $.37 per share for
the year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
SPECTRASCIENCE has financed its operations since 1992 principally
through private placements of its common and preferred stock. From October 1992,
when we began development of our current products and changed our name, until
December 31, 1999, we had obtained funds aggregating approximately $16.2 million
in net proceeds from the issuance of common stock and preferred stock. As of
December 31, 1999, SPECTRASCIENCE had cash and cash equivalents of $4,362,120
and working capital of $3,518,136. As of March 31, 2000, SPECTRASCIENCE had cash
and cash equivalents of $4, 477,138 and working capital of $3,629,507.
In 1999, SPECTRASCIENCE completed two private placements of common
stock. In March 1999, a private placement of 293,750 shares of its common stock
at $4.00 per share was completed. In December 1999, multiple closings placed
995,285 shares of common stock at $3.50 per share. The private placement was
completed in January 2000 after placing an additional 13,000 shares of common
stock at $3.50 per share. A total of 1,008,285 shares of common stock were
issued in connection with the December 1999 Private Placement of common stock.
During the quarter ended March 31, 2000, SPECTRASCIENCE received $595,638
pursuant to stock option exercises for the purchase of 143,020 shares of common
stock. Management plans to use these funds to commercialize the Virtual
Biopsy(TM) System, to continue development of new applications for the Virtual
Biopsy(TM) System, and for general corporate purposes, including working
capital. See "Description of Securities--Warrants."
Net cash used in operating activities was $501,533 for the quarter
ended March 31, 2000, and $493,264 for the quarter ended March 31, 1999. The net
cash used in operating activities resulted primarily from net losses. Net cash
used in investing activities was $24,587 for the quarter ended March 31, 2000,
and $12,408 for the quarter ended March 31, 1999. The net cash used in investing
activities was attributable to the purchase of tools and equipment for research
and development and manufacturing, and a reduction of our lease commitment on
the space at 3650 Annapolis Lane. Net cash provided by financing activities was
$641,138 for the quarter ended March 31, 2000, and $2,179,814 for the quarter
ended March 31, 1999. The net cash provided by financing activities during the
quarter ended March 31, 2000 was primarily due to stock option exercises. The
net cash provided by financing activities during the same period in 1999 was
primarily due to a private placement and the exercise of warrants.
Net cash used in operating activities was approximately $2.14 million
for the year ended December 31, 1999, and $2.34 million for the year ended
December 31, 1998. The net cash used in operating activities resulted primarily
from net losses. Net cash used in investing activities was $126,927 for the year
ended December 31, 1999, and $19,183 for the year ended December 31, 1998. The
net cash used in investing activities was primarily attributable to the purchase
of tools and
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equipment for research and development and manufacturing, and capital assets
associated with our move to a new facility. Net cash provided by financing
activities was $6,326,320 for the year ended December 31, 1999, and $1,024,187
for the year ended December 31, 1998. The net cash provided by financing
activities was primarily attributable to the two placements of our common stock
during 1999, and the exercise of warrants.
SPECTRASCIENCE expects to incur significant additional operating losses
through at least 2000, as research and development activities continue, new
clinical trials are started and marketing efforts to commercialize the Virtual
Biopsy(TM) System are undertaken. The Company anticipates that it has sufficient
cash and cash equivalents to fund its operations, including increased working
capital expenditures, for at least the next 15 months.
SPECTRASCIENCE's future liquidity and capital requirements will depend
upon a number of factors, including the progress and expense of developing new
applications for the Virtual Biopsy(TM) System, clinical trials, the potential
requirements and related costs for product modifications, the timing and expense
of various U.S. and foreign regulatory filings, the timing of receipt of various
U.S. and foreign government approvals, the timing and extent to which
SPECTRASCIENCE's products gain market acceptance, the timing and expense of
product introduction, and the expense of developing marketing and distribution
capabilities, if regulatory approvals are obtained.
YEAR 2000 ISSUE
SPECTRASCIENCE completed the transition from calendar year 1999 to 2000
with no material difficulties. We will continue to evaluate Year 2000 related
exposures at our vendors, suppliers and other third parties. We will also
continue to monitor our systems, facilities and products to ensure no Year 2000
problems occur over the next few months. Our costs associated with Year 2000
compliance to date have been within budgeted amounts. We have not incurred any
significant expenditures after December 31, 1999 in connection with Year 2000
compliance issues. Management believes there will not be a material adverse
impact on SPECTRASCIENCE's financial condition or results of operation due to
Year 2000 compliance issues.
PROPERTY
SPECTRASCIENCE leases its principal executive offices at 14405 21st
Avenue North, Suite 111, Minneapolis, Minnesota. This facility consists of
approximately 13,282 square feet of office, research and development,
manufacturing, quality testing, and warehouse space. The lease provides for
monthly rental payments of $7,759 for the first 12 months, $8,250 for the next 4
months, and $8,502 for the next 24 months. The current rent including a pro rata
share of operating expenses and real estate taxes is approximately $11,943 per
month. The lease expires at the end of January 2003. Management believes this
facility provides the necessary space needed for anticipated manufacturing and
ramp-up activities for the commercialization of the Virtual Biopsy(TM) System,
and has no present plans to perform any improvements to the facility. Management
believes that appropriate levels of standard property and casualty insurance
coverage on its property are being maintained.
PRICE RANGE OF COMMON STOCK
Our common stock, $ .25 par value, traded on the Nasdaq SmallCap Market
during 1998 but was delisted at the close of business on March 17, 1999. Since
March 18, 1999, our common stock has been trading on the Over-The-Counter
Bulletin Board under the symbol "SPSI." The common stock traded on the National
Association of Securities Dealers Automated Quotation System from November 13,
1984 under the symbol "GVMI." In September 1992, the stock symbol was changed
from "GVMI" to "SPSC." The stock symbol was subsequently changed to "SPSI" in
June 1994. On June 30, 2000, the last reported bid price of the common stock was
$6.25. As of June 30, 2000, there were approximately 1,020 holders of record of
our common stock. The following table sets forth, for the periods indicated, the
high and low sales prices as reported by NASDAQ and OTC Bulletin Board. To the
best of our knowledge, we believe that the information obtained from these
sources is accurate.
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<TABLE>
<CAPTION>
1999 Stock Prices (1) 1998 Stock Prices
----------------------------- ------------------------------
QUARTER ENDED High Sales Low Sales High Sales Low Sales
-------------------- ----------------------------- ------------------------------
<S> <C> <C> <C> <C>
March 31 $6.500 $3.500 $8.000 $3.690
June 30 $5.500 $3.250 $7.625 $4.000
September 30 $5.875 $3.063 $5.500 $2.875
December 31 $8.500 $3.813 $8.000 $3.625
-------------------------------------------------------------------------------------
</TABLE>
(1) The prices of the our common stock stock reflect inter-dealer prices
and do not necessarily reflect the prices of actual transactions.
The sales prices reflect prices without retail mark-up, mark-down or
commission and may not represent actual transactions.
DIVIDEND POLICY
To date, the Company has not declared or paid cash dividends on the
common stock. The current policy of the Board of Directors is to retain any
earnings to fund development of its business. Consequently, no cash dividends
are expected to be paid on the common stock in the foreseeable future.
DESCRIPTION OF SECURITIES
GENERAL
SPECTRASCIENCE's authorized capital stock consists of 10,000,000 shares
of common stock, $.25 par value per share and 20,000,000 shares of undesignated
preferred stock, $1.00 par value per share. There were 6,760,821 shares of
common stock issued and outstanding as of June 30, 2000, held by approximately
1,020 shareholders of record. There were 2,354,399 shares of common stock
reserved for issuance of common stock upon the exercise of outstanding options
and warrants. As of June 30, 2000, SPECTRASCIENCE had no issued and outstanding
shares of preferred stock.
The following is only a summary of the terms and provisions of our
securities. For complete terms and provisions we refer you to SPECTRASCIENCE's
Articles of Incorporation and Bylaws and applicable law.
COMMON STOCK
Each common stock shareholder is entitled to one vote for each share
held of record on all matters submitted to a vote of shareholders. There is no
cumulative voting for the election of directors. Shareholders of more than 50%
of the outstanding common stock voting for the election of directors can elect
all of the directors, if they so choose. Except for applicable preferences of
any outstanding preferred stock, common stock shareholders are entitled, on an
equal basis, to receive dividends declared by the Board of Directors out of
funds legally available, and share in all assets available for distribution to
common stock shareholders upon liquidation, dissolution or winding up of the
affairs of SpectraScience. Common stock shareholders have no preemptive,
subscription or conversion rights, and there are no applicable redemption or
sinking fund provisions. The outstanding shares of common stock are, and the
shares of common stock offered under this prospectus will be, fully paid and
nonassessable.
PREFERRED STOCK
SPECTRASCIENCE's Board of Directors is authorized, without further
shareholder action, to issue preferred stock in one or more series and to fix
the voting rights, liquidation preferences, dividend rights, repurchase rights,
conversion rights, redemption rights and terms, including sinking fund
provisions, and certain other rights and preferences, of the preferred stock.
Although there is no current intention to do so, the Board of Directors could
issue shares of a class or series of preferred stock with voting and conversion
rights which could adversely affect the voting power or dividend rights of the
holders of common stock, and could have the effect of delaying, deferring or
preventing a change in control of SPECTRASCIENCE.
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WARRANTS
All outstanding warrants of SPECTRASCIENCE provide for automatic
adjustment of the number of shares issuable upon exercise, and the exercise
price, upon the occurrence of events such as:
* stock dividends or stock splits * distributions of common stock
* reorganizations, reclassifications, * the merger, consolidation
or subdivisions and combinations or sale of substantially all
of the common stock SPECTRASCIENCE assets.
As of June 30, 2000 SPECTRASCIENCE had the following outstanding warrants:
* warrants to purchase 87,668 shares of common stock at $6.00 per
share, expiring August 28, 2000, as amended, issued to investors in
our Series B Convertible Preferred Stock;
* warrants to purchase 146,875 shares of common stock at $5.00 per
share, expiring March 2001, issued to investors in our March 1999
Private Placement of common stock;
* warrants to purchase 79,250 shares of common stock at $5.00 per
share, expiring December 2000, issued to Miller, Johnson & Kuehn
Inc., the placement agent for our Series B Preferred Stock Private
Placement;
* warrants to purchase 87,503 shares of common stock at $5.00 per
share, expiring March 2002, issued to lenders who participated in a
1994 bridge loan transaction;
* warrants to purchase 504,143 shares of common stock at $5.50 per
share, expiring December 2001, issued to investors in our December
1999 Private Placement of common stock; and
* warrants to purchase 85,715 shares of common stock at $5.50 per
share, expiring June 2002, issued to the holder of a convertible
demand note.
REGISTRATION RIGHTS
Holders of the warrants have "piggyback" rights to include the shares
underlying their warrants in any registration statement filed by us during the
period ending five years from the closing of the offering. The holders of the
warrants also have "demand" rights. The holders of the 87,668 warrants expiring
August 28, 2000 may require, during the period ending five years from the
closing of the offering, by action of not less than the holders of a majority of
the warrants, up to one "demand" registration by SPECTRASCIENCE, of the shares
underlying the warrants. The holders of the 146,875 warrants expiring in March
2001, the holders of the 504,143 warrants expiring in December 2001, and the
holder of the 85,715 warrants expiring June 2002 may require, during the period
ending two years from the closing of the offering, by action of not less than
the holders of a majority of the warrants, up to one "demand" registration by
SPECTRASCIENCE, of the shares underlying the warrants. In addition, any holder
of the warrants has "demand" rights during the period ending five years from the
closing of the offering to require one "demand" registration of the shares
underlying such holder's warrants, solely at the expense of such holder. We also
granted "piggyback" rights to those employees holding stock options that were
granted outside of the 1991 Stock Plan. To our knowledge, no other holders of
our securities have registration rights.
MINNESOTA BUSINESS CORPORATION ACT
Certain provisions of Minnesota law described below could have an
anti-takeover effect. These provisions are intended to provide management
flexibility to enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors and in the policies formulated
by the Board and to discourage an unsolicited takeover of the Company, if the
Board determines that such a takeover is not in the best interests of the
Company and its shareholders. However, these provisions could have the effect of
discouraging certain attempts to acquire the Company which could deprive the
Company's shareholders of opportunities to sell their shares of common stock at
prices higher than prevailing market prices.
Section 302A.671 of the Minnesota Business Corporations Act applies,
with certain exceptions, to any acquisition of voting stock of the Company (from
a person other than the Company, and other than in connection with certain
mergers and exchanges to which the Company is a party) resulting in the
beneficial ownership by the acquiring party of 20% or more of the voting stock
then outstanding. Section 302A.671 requires approval of any such acquisitions by
a majority vote of the shareholders of the Company prior to its consummation. In
general, shares acquired in the absence of such approval are denied voting
rights and are redeemable at their then fair market value by the Company within
30 days after the acquiring
42
<PAGE>
person has failed to give a timely information statement to the Company or the
date the shareholders voted not to grant voting rights to the acquiring person's
shares.
Section 302A.673 of the Minnesota Business Corporation Act restricts
certain transactions between the Company and certain shareholders who become the
beneficial holders of 10% or more of the Company's outstanding voting stock
("interested shareholders") unless a majority of the disinterested directors of
the Company has approved, prior to the date on which the interested shareholders
acquire a 10% interest, either the business combination transaction suggested by
such shareholders or the acquisition of shares that increased such shareholders'
beneficial ownership to 10% or more of the outstanding voting stock. If such
prior approval is not obtained, the statute imposes a four-year prohibition from
the interested shareholders' share acquisition date on mergers, sales of
substantial assets, loans, substantial issuances of stock, and various other
transactions involving the Company and the statutory interested shareholder or
its affiliates.
In the event of certain tender offers for stock of the Company, Section
302A.675 of the Minnesota Business Corporation Act precludes the tender offeror
from acquiring additional shares of stock (including acquisitions pursuant to
mergers, consolidations or statutory share exchanges) within two years following
the completion of such an offer unless the selling shareholders are given the
opportunity to sell the shares on terms that are substantially equivalent to
those contained in the earlier tender offer. Section 302A.675 does not apply if
a committee of the Board of Directors consisting of all of its disinterested
directors (excluding present and former officers of the corporation) approves
the subsequent acquisition before shares are acquired pursuant to the earlier
tender offer.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar with respect to the common stock is
Norwest Bank Minnesota, N.A.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITITES ACT LIABILITIES
Minnesota Statutes Section 302A.521 provides that a corporation shall
indemnify any person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of such person against
judgments, penalties, fines, including, without limitation, excise taxes
assessed against such person with respect to any employee benefit plan,
settlements and reasonable expenses, including attorneys' fees and
disbursements, incurred by such person in connection with the proceeding, if,
with respect to the acts or omissions of such person complained of in the
proceeding, such person:
* has not been indemnified therefor by another organization or
employee benefit plan;
* acted in good faith;
* received no improper personal benefit and Section 302A.255 with
respect to director conflicts of interest, if applicable, has been
satisfied;
* in the case of a criminal proceeding, had no reasonable cause to
believe the conduct was unlawful; and
* reasonably believed that the conduct was in the best interests of
the corporation in the case of acts or omissions in such person's
official capacity for the corporation or reasonably believed that
the conduct was not opposed to the best interests of the corporation
in the case of acts or omissions in such person's official capacity
for other affiliated organizations.
Article IX of the Company's Bylaws incorporates the indemnification provisions
set forth in Section 302A.521 of the Minnesota Statutes.
Provisions regarding indemnification of officers and directors of the
Company are contained in the Company's Articles of Incorporation, as amended
(Exhibit 3.1 to this Registration Statement) and the Company's Bylaws, as
amended (Exhibit 3.2 to this Registration Statement), each of which are
incorporated herein by reference.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
the Company by Chappell White LLP, Boston, Massachusetts.
43
<PAGE>
EXPERTS
The financial statements of SpectraScience, Inc. appearing in its
Annual Report (Form 10-KSB) for the year ended December 31, 1999, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). This
Registration Statement, including exhibits thereto, and such reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at certain of the Commission's regional offices located at 7
World Trade Center, New York, New York 10048; and Citicorp Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can also be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a world wide web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
"http://www.sec.gov."
The Company has filed with the Commission a Registration Statement on
Form SB-2 (the "Registration Statement") under the Securities Act with respect
to shares of common stock being offered hereby. This Prospectus, which
constitutes part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain items of which are
contained in schedules and exhibits to the Registration Statement as permitted
by the rules and regulations of the Commission. Statements made in this
Prospectus concerning the contents of any documents referred to herein are not
necessarily complete. With respect to each document filed with the Commission as
an exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description, and each such statement shall be deemed qualified in
its entirety by such reference.
44
<PAGE>
--------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information or
to make any representation in connection with this Offering other than those
contained in this Prospectus, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or any of the Underwriters. This Prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any of the securities offered hereby by
anyone in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such offer or solicitation is not qualified to do
so or to anyone to whom it is unlawful to make such an offer or solicitation.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that the information herein is correct
as of any time subsequent to the date of this Prospectus.
--------------------
TABLE OF CONTENTS
Page
Prospectus Summary.............................. 4
Summary Financial Data.......................... 6
Risk Factors.................................... 7
Use of Proceeds................................. 13
Capitalization.................................. 13
Selling Security Holders........................ 14
Plan of Distribution............................ 15
Legal Proceedings............................... 15
Directors, Executive Officers and Key Employees. 16
Principal Shareholders.......................... 21
Certain Transactions............................ 22
Description of Business......................... 23
Management's Discussion and Analysis of
Financial Condition and Results of Operations. 37
Property........................................ 40
Price Range of Common Stock..................... 40
Dividend Policy................................. 41
Description of Securities....................... 41
Legal Matters................................... 43
Experts......................................... 44
Additional Information.......................... 44
--------------------
139,250 Shares
SPECTRASCIENCE, INC.
Common Stock
--------------------------------------------------------------------------------
PROSPECTUS
--------------------------------------------------------------------------------
July 7, 2000
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Minnesota Statutes Section 302A.521 provides that a corporation shall
indemnify any person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of such person against
judgments, penalties, fines, including, without limitation, excise taxes
assessed against such person with respect to any employee benefit plan,
settlements and reasonable expenses, including attorneys' fees and
disbursements, incurred by such person in connection with the proceeding, if,
with respect to the acts or omissions of such person complained of in the
proceeding, such person:
* has not been indemnified therefor by another organization or
employee benefit plan;
* acted in good faith;
* received no improper personal benefit and Section 302A.255 with
respect to director conflicts of interest, if applicable, has been
satisfied;
* in the case of a criminal proceeding, had no reasonable cause to
believe the conduct was unlawful; and
* reasonably believed that the conduct was in the best interests of
the corporation in the case of acts or omissions in such person's
official capacity for the corporation or reasonably believed that
the conduct was not opposed to the best interests of the corporation
in the case of acts or omissions in such person's official capacity
for other affiliated organizations.
Article IX of the Company's Bylaws incorporates the indemnification provisions
set forth in Section 302A.521 of the Minnesota Statutes.
Provisions regarding indemnification of officers and directors of the
Company are contained in the Company's Articles of Incorporation, as amended
(Exhibit 3.1 to this Registration Statement) and the Company's Bylaws, as
amended (Exhibit 3.2 to this Registration Statement), each of which are
incorporated herein by reference.
The Company maintains a directors and officers insurance policy.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following fees and expenses will be paid by the Company in
connection with the issuance and distribution of the securities registered
hereby and do not include underwriting commissions and discounts. All such
expenses, except for the SEC, NASD and Nasdaq fees, are estimated.
SEC registration fee ............................. $ 240
Legal fees and expenses .......................... 5,000
Accounting fees and expenses ..................... 2,500
Blue Sky fees and expenses ....................... 0
Transfer Agent's and Registrar's fees ............ 100
Printing and engraving expenses .................. 500
Miscellaneous .................................... 250
---------
Total ................................. $ 8,590
=========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1997, the Company has issued and sold the following
securities, which were not registered under the Securities Act of 1933, as
amended:
During 1994 and 1995, the Company granted warrants to the participants
in the bridge financing agreements it had entered into to purchase 174,
998 shares of the Company's common stock at $3.00 per share. The
Company received net proceeds of $525,000 when these warrants were
exercised in March 1999. Upon exercising the warrants, the holders
received additional warrants to purchase 87,503 shares of common
<PAGE>
stock at $5.00 per share. The shares of common stock issuable upon
exercise of these warrants were registered in a Registration Statement
on Form SB-2 that was declared effective May 12, 2000.
On December 28, 1995, the Company completed a private placement with
qualified investors of 792,500 shares of Series B Convertible Preferred
Stock ("Preferred B"), par value $1.00, at $5.00 per share. Holders of
Preferred B were issued warrants to purchase a total of 264,175 shares
of common stock exercisable at $9.50 per share. The warrants originally
expired in December 1998. In December 1998, the Company extended the
exercise period to January 1999 and repriced the warrants to $6.00 per
share. Contingent upon exercising, the holders would also receive
additional warrants to purchase an equal number of shares of common
stock at $6.00 per share. In January 1999, warrants to purchase 87,668
shares of common stock were exercised at $6.00 per share, resulting in
net proceeds to the company of $485,407. The company paid $40,601 to
Miller, Johnson & Kuehn, Incorporated, in connection with the exercise
of the warrants. The 87,668 shares of common stock purchased in 1999
and the shares of common stock issuable upon exercise of the warrants
issued in January 1999 to purchase 87,668 shares of common stock were
registered in a Registration Statement on Form SB-2 that was declared
effective May 12, 2000.
On March 12, 1999, the Company completed a private placement with
qualified investors of 293,750 shares of common stock, par value $.25,
at $4.00 per share. Holders of this common stock were issued warrants
to purchase 146,875 shares of common stock exercisable at $5.00 per
share. Net proceeds to the Company were $1,175,000 after related costs
of $17,500. The 293,750 shares of common stock and the 146,875 shares
of common stock issuable upon the exercise of the warrants were
registered in a Registration Statement on Form SB-2 that was declared
effective May 12, 2000.
During December 1999 and January 2000, the Company had multiple
closings with qualified investors which placed 1,008,285 shares of
common stock, par value $.25, at $3.50 per share. Holders of this
common stock were issued warrants to purchase 504,143 shares of common
stock exercisable at $5.50 per share. Net proceeds to the Company were
$3,190,198. The company paid $334,300 to Miller, Johnson & Kuehn,
Incorporated in connection with the placement of the shares. The
1,008,285 shares of common stock and the 504,143 shares of common stock
issuable upon the exercise of the warrants were registered in a
Registration Statement on Form SB-2 that was declared effective May 12,
2000.
On December 30, 1999 the Company issued a convertible demand note for
$600,005 with a related party, Reggeborgh Beheer BV. The note was
converted into 171,430 shares of common stock on June 30, 2000 and a
warrant to purchase 85,715 shares of common stock at an exercise price
of $5.50 per share. The warrant expires June 30, 2002.
The sale of securities above was made in reliance upon Section 4(2) and
Regulation D of the Securities Act, which provide exemption for
transactions not involving a public offering. The purchasers of
securities described above represented that they acquired such
securities for their own account and not with a view to any
distribution thereof to the public. The Company made inquiries of
purchasers of securities in these transactions and obtained
representations from such purchasers to establish that such issuances
qualified for an exemption from the registration requirements.
<PAGE>
ITEM 27. EXHIBITS
Exhibit
Number Description
------ ---------------------------
3.1 Articles of Incorporation, as amended. (Incorporated by reference to
the Company's Annual Report on Form 10-KSB, Exhibit 3.1, for the year
ended December 31, 1996.)
3.2 Bylaws, as amended. (Incorporated by reference to the Company's Annual
Report on Form 10-KSB, Exhibit 3.2, for the year ended December 31,
1995.)
4.1 Specimen Form of the Common Stock Certificate (previously filed)
5.1 Opinion of Chappell White LLP (filed herewith)
10.1 1991 Stock Plan adopted by the Company's Board of Directors on July 11,
1991 and shareholders on January 30, 1992. (Incorporated by reference
to the Company's Annual Report on Form 10-K, Exhibit 10.12, for the
year ended December 31, 1991.)
10.2 Amendment to 1991 Stock Plan adopted by the Company's Board of
Directors on July 11, 1991 and shareholders on January 30, 1992.
(Incorporated by reference to the Company's Form 8-K Report filed with
the Securities and Exchange Commission on or about February 3, 1992.)
10.3 Amendment to 1991 Stock Plan adopted by the Company's shareholders on
June 28, 1995. (Incorporated by reference to the Company's Registration
Statement on Form S-8, Commission File No. 033-63047, as filed on
September 28, 1995.)
10.4 Amendment to 1991 Stock Plan adopted by the Company's Board of
Directors on October 4, 1995. (Incorporated by reference to the
Company's definitive Proxy Statement for its 1996 Annual Meeting of
Shareholders.)
10.5 Amendment to 1991 Stock Plan adopted by the Company's shareholders on
March 28, 1996. (Incorporated by reference to the Company's
Registration Statement on Form S-8, Commission File No. 333-4393, as
filed on May 23, 1996.)
10.6 Amendment to 1991 Stock Plan as it pertains to Section 5(k) of the Plan
regarding Directors options, adopted by the Company's Board of
Directors on October 9, 1996. (Incorporated by reference to the
Company's Annual Report on Form 10-KSB, Exhibit 10.10, for the year
ended December 31, 1996.)
10.7 Amendment to 1991 Stock Plan as it pertains to Section 3 of the Plan,
adopted by the Company's Board of Directors on March 9, 1998.
(Incorporated by reference to the Company's Annual Report of Form 10-K
for the year ended December 31, 1997.)
10.8 Self-Insurance Trust Agreement between the Company and Richfield Bank
and Trust Co., as trustee dated March 5, 1987. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1986.)
10.9 Severance (Change in Control) Agreement between the Company and Chester
E. Sievert, Jr. dated May 21, 1997. (Incorporated by reference to the
Company's Annual Report of Form 10-K for the year ended December 31,
1997.)
10.10 Five-Year Lease Agreement between the Company and St. Paul Properties,
Inc. dated October 10, 1996 (Incorporated by reference to the Company's
Annual Report on Form 10-KSB, Exhibit 10.17, for the year ended
December 31, 1996.)
10.11 Clinical Research Agreement between The General Hospital Corporation,
doing business as Massachusetts General Hospital, and the Company dated
June 1, 1995. (Incorporated by reference to the Company's Annual Report
on Form 10-KSB, Exhibit 10.15, for the year ended December 31, 1995.)
10.12 Manufacturing and Sales Agreement, dated June 23, 1997, between Portlyn
Corporation and the Company. (Incorporated by reference to Exhibit
10.28 to Amendment No. 1 to the Company's Registration Statement on
Form SB-2, dated October 7, 1998, Commission File No. 333-59395.)
10.13 Lease Agreement between the Company and Urologix, Inc. dated September
23, 1999 (Incorporated by reference to the Company's Annual Report on
Form 10-KSB, Exhibit 10.23, for the year ended December 31, 1999.)
10.14 Form of Warrant issued to the selling agents for our Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock,
(Incorporated by reference to the Company's Form S-3 Registration
Statement, Registration # 333-01149, as filed on February 22, 1996.)
10.15 Form of Warrant issued to investors who exercised their amended
warrants in January 1999 (Incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration # 333-84213, as filed
on April 14, 2000).
10.16 Form of Warrant issued to Qualified Lenders who exercised their
warrants in March 1999 (Incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration # 333-84213, as filed
on April 14, 2000).
<PAGE>
10.17 Form of Warrant issued to investors in the March 1999 private placement
of the Company's common stock (Incorporated by reference to the
Company's Registration Statement on Form SB-2, Registration #
333-84213, as filed on April 14, 2000).
10.18 Form of Warrant issued to investors in the December 1999 private
placement of the Company's common stock (Incorporated by reference to
the Company's Registration Statement on Form SB-2, Registration #
333-84213, as filed on April 14, 2000).
23.1 Consent of Independent Auditors, (Incorporated by reference to the
company's Annual Report on Form 10-KSB, Exhibit 23.1, for the year
ended December 31, 1999)
23.2 Consent of Chappell White LLP (included in Exhibit 5.1)
24.1 Powers of Attorney, filed herewith.
99.1 Settlement Agreement between Paul F. Gibson and SpectraScience, Inc.
dated October 21, 1994 (filed herewith).
99.2 Findings of Fact, Conclusions of Law, and Order for Judgement in the
case of Paul Gibson v SpectraScience, Inc. dated June 2, 2000 (filed
herewith).
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
That, insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis, State of Minnesota, on July 7, 2000.
SPECTRASCIENCE, INC.
By: /s/ Chester E. Sievert, Jr.
------------------------------
Chester E. Sievert, Jr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement on Form SB-2 has been signed by the following persons in the
capacities indicated on July 6, 2000.
SIGNATURE TITLE
--------- -----
/s/ Chester E. Sievert, Jr. Chairman, Chief Executive Officer
----------------------------------------- and Director (principal executive
Chester E. Sievert, Jr., Attorney-in-fact officer and principal financial and
accounting officer)
* Vice President Marketing and Sales
-----------------------------------------
Scott G. Anderson
* Director
-----------------------------------------
Henry M. Holterman
* Director
-----------------------------------------
Johan A.P.M. de Hond
*By /s/ Chester E. Sievert, Jr.
--------------------------------
Chester E. Sievert, Jr.
Attorney-in-fact
<PAGE>
SpectraScience, Inc.
Audited Financial Statements
Years ended December 31, 1997, 1998 and 1999
CONTENTS
Report of Independent Auditors..............................................F-1
Audited Financial Statements
Balance Sheets...............................................................F-2
Statements of Operations.....................................................F-3
Statement of Changes in Stockholders' Equity.................................F-4
Statements of Cash Flows.....................................................F-5
Notes to Financial Statements................................................F-6
Page F
<PAGE>
Report of Independent Auditors
Board of Directors
SpectraScience, Inc.
We have audited the accompanying balance sheets of SpectraScience, Inc. as of
December 31, 1998 and 1999, and the related statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SpectraScience, Inc. at
December 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 11, 2000
Page F-1
<PAGE>
SpectraScience, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1999
--------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 301,970 $ 4,362,120
Inventory 185,625 143,660
Interest receivable -- 13,314
Note receivable from related party 24,030 --
Prepaid expenses 50,638 83,756
Other current assets 10,585 31,508
--------------------------------
Total current assets 572,848 4,634,358
Fixed assets:
Office furniture and equipment 266,400 288,665
Machinery and equipment 562,919 560,669
Leasehold improvements -- 11,186
--------------------------------
829,319 860,520
Less accumulated depreciation (581,788) (566,774)
--------------------------------
Total assets $ 820,379 $ 4,928,104
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 236,769 $ 150,094
Note payable - trade creditors 45,217 66,109
Note payable to related party -- 600,005
Accrued compensation and taxes 99,263 162,457
Accrued expenses 56,990 90,158
Accrued clinical research fees 162,400 47,399
--------------------------------
Total current liabilities 600,639 1,116,222
Long-term portion of lease commitment -- 45,660
Stockholders' equity:
Common stock, $.25 par value:
Authorized shares--10,000,000
Issued and outstanding shares--4,737,804 in 1998
and 6,420,705 in 1999 1,184,451 1,605,176
Additional paid-in capital 45,586,659 50,892,249
Accumulated deficit (46,551,370) (48,731,203)
---------------------------------
Total stockholders' equity 219,740 3,766,222
---------------------------------
Total liabilities and stockholders' equity $ 820,379 $ 4,928,104
=================================
</TABLE>
SEE ACCOMPANYING NOTES.
Page F-2
<PAGE>
SpectraScience, Inc.
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1998 1999
------------------------------------------------
<S> <C> <C> <C>
EXPENSES
Research and development $ 1,095,281 $ 1,719,171 $ 1,356,986
Selling, general and administrative 679,809 746,953 794,221
------------------------------------------------
Net loss from operations (1,775,090) (2,466,124) (2,151,207)
OTHER (INCOME) EXPENSE
Interest and other (income) expense (131,299) (51,982) 28,626
------------------------------------------------
Net loss $ (1,643,791) $ (2,414,142) $ (2,179,833)
================================================
Net loss per share $ (.37) $ (.52) $ (.41)
Weighted average common shares outstanding 4,467,233 4,663,559 5,288,974
</TABLE>
SEE ACCOMPANYING NOTES.
Page F-3
<PAGE>
SpectraScience, Inc.
Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE SERIES B CONVERTIBLE
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
--------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1996 3,621,212 $ 905,303 66,667 $ 66,667 792,500 $ 792,500
Conversion of Series A preferred
stock into common shares 66,667 16,667 (66,667) (66,667) -- --
Conversion of Series B preferred
stock into common shares 792,500 198,125 -- -- (792,500) (792,500)
Exercise of Series A preferred
stock detachable warrants into
common stock 16,111 4,028 -- -- -- --
Exercise of stock options 10,069 2,517 -- -- -- --
Net loss -- -- -- -- -- --
--------------------------------------------------------------------------------
Balance December 31, 1997 4,506,559 1,126,640 -- -- -- --
Exercise of Series A preferred
stock detachable warrants into
common stock 148,445 37,111 -- -- -- --
Exercise of stock options 82,800 20,700 -- -- -- --
Net loss -- -- -- -- -- --
--------------------------------------------------------------------------------
Balance December 31, 1998 4,737,804 1,184,451 -- -- -- --
Exercise of warrants into common
stock 174,998 43,749 -- -- -- --
Exercise of Series B preferred
stock detachable warrants into
common stock 87,668 21,917 -- -- -- --
Exercise of stock options 131,200 32,800 -- -- -- --
Private placement of common stock 1,289,035 322,259 -- -- -- --
Net loss -- -- -- -- -- --
--------------------------------------------------------------------------------
Balance December 31, 1999 6,420,705 $1,605,176 -- $ -- -- $ --
================================================================================
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
-------------------------------------------
<S> <C> <C> <C>
Balance December 31, 1996 $ 43,886,939 $(42,493,437) $ 3,157,972
Conversion of Series A preferred
stock into common shares 50,000 -- --
Conversion of Series B preferred
stock into common shares 594,375 -- --
Exercise of Series A preferred
stock detachable warrants into
common stock 56,527 -- 60,555
Exercise of stock options 32,442 -- 34,959
Net loss -- (1,643,791) (1,643,791)
-------------------------------------------
Balance December 31, 1997 44,620,283 (44,137,228) 1,609,695
Exercise of Series A preferred
stock detachable warrants into
common stock 705,114 -- 742,225
Exercise of stock options 261,262 -- 281,962
Net loss -- (2,414,142) (2,414,142)
-------------------------------------------
Balance December 31, 1998 45,586,659 (46,551,370) 219,740
Exercise of warrants into common
stock 481,251 -- 525,000
Exercise of Series B preferred
stock detachable warrants into
common stock 463,490 -- 485,407
Exercise of stock options 375,910 -- 408,710
Private placement of common stock 3,984,939 -- 4,307,198
Net loss -- (2,179,833) (2,179,833)
-------------------------------------------
Balance December 31, 1999 $50,892,249 $(48,731,203) $ 3,766,222
===========================================
</TABLE>
SEE ACCOMPANYING NOTES
Page F-4
<PAGE>
SpectraScience, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1998 1999
-------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,643,791) $ (2,414,142) $ (2,179,833)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 64,666 141,083 79,566
Loss on disposal of fixed assets -- -- 1,146
Changes in operating assets and liabilities:
Interest receivable -- -- (13,314)
Inventory 11,677 (219,536) 41,965
Note receivable from related party -- (24,030) 24,030
Prepaid expenses 10,470 7,297 (33,118)
Other current assets (5,153) 29,899 (20,923)
Accounts payable and accrued expenses 69,800 138,222 (38,762)
-------------------------------------------------
Net cash used in operating activities (1,492,331) (2,341,207) (2,139,243)
INVESTING ACTIVITIES
Purchases of fixed assets (12,192) (19,183) (126,927)
-------------------------------------------------
Net cash used in investing activities (12,192) (19,183) (126,927)
FINANCING ACTIVITIES
Note payable to related party -- -- 600,005
Proceeds from issuance of common stock 95,514 1,024,187 5,726,315
-------------------------------------------------
Net cash provided by financing activities 95,514 1,024,187 6,326,320
-------------------------------------------------
Net decrease in cash and cash equivalents (1,409,009) (1,336,203) 4,060,150
Cash and cash equivalents at beginning of year 3,047,182 1,638,173 301,970
-------------------------------------------------
Cash and cash equivalents at end of year $ 1,638,173 $ 301,970 $ 4,362,120
=================================================
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Series A preferred stock converted into common stock $ 66,667 $ -- $ --
Series B preferred stock converted into common stock 792,500 -- --
Transfer of inventory to equipment -- 214,385 --
</TABLE>
SEE ACCOMPANYING NOTES.
Page F-5
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements
December 31, 1999
1. BUSINESS
The Company was incorporated on May 4, 1983 as GV Medical, Inc. and was engaged
in the development of laser angioplasty catheter systems. Subsequently, the
Company changed its name to SpectraScience, Inc. on October 16, 1992, which was
approved by the shareholders on May 13, 1993. The Company is now focused on the
development and manufacturing of 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents. Cash equivalents are carried at
cost which approximates market value.
FIXED ASSETS
Fixed assets are stated at cost. The Company depreciates the cost of the
property over its estimated useful life of five years using the straight-line
method. Leasehold improvements are depreciated over the related lease term or
estimated useful life, whichever is shorter.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted future net cash
flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on a
first-in, first-out basis. The majority of the inventories consists of purchased
components.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from the estimates.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Page F-6
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements
December 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying
amount of assets and liabilities and their respective tax bases.
NET LOSS PER SHARE
Basic earnings per share is based on weighted average shares outstanding and
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share for the Company is the same as basic earnings per
share because the effect of options and warrants is anti-dilutive.
3. INVENTORY
Inventory consists of the following:
DECEMBER 31
1998 1999
--------------------------
Raw materials $176,625 $143,660
Finished goods 9,000 --
--------------------------
$185,625 $143,660
==========================
4. CAPITAL STOCK AND WARRANTS
During 1994 and 1995, the Company granted warrants to the participants in the
bridge financing agreements it had entered into to purchase 174,998 shares of
the Company's common stock at $3.00 per share. The warrants were exercised in
March 1999 at $3.00 per share, resulting in net proceeds to the Company of
$525,000. Upon exercising the warrants, the holders received additional warrants
to purchase 87,503 shares of common stock at $5.00 per share. These warrants
expire in March 2002.
From March 1995 to June 1995, the Company sold 500,000 shares of Series A
convertible preferred stock at $3.00 per share in a private placement for
$1,500,000 less related costs of $60,000. Upon completion of the sale of the
Series A convertible preferred stock, bridge loans of $525,000 were converted
into 174,998 shares of Series A convertible preferred stock at a price of $3.00
per share. In addition, the Company issued warrants to the investors to purchase
225,000 shares of the Company's common stock at $5.00 per share. In March 1996,
the nondividend yielding shares of Series A convertible preferred stock were
converted into an equivalent number of shares of common stock. All warrants
related to the Series A convertible preferred stock were exercisable for three
years from the date of grant. During 1996 through 1998, 184,556 warrants were
exercised at $5.00 per share. The remaining 40,444 warrants expired in 1998.
During 1995, the Company issued warrants to the placement agent to purchase
20,000 shares of the Company's common stock at $3.00 per share. In 1997, 10,000
warrants were exercised at $3.00 per share. The remaining warrants are
outstanding and expire five years from the date of the grant. In 1995, the
Page F-7
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements
December 31, 1999
4. CAPITAL STOCK AND WARRANTS (CONTINUED)
Company also issued additional warrants to the placement agent to purchase 6,667
shares of the Company's common stock at $5.00 per share. In 1997, 3,333 warrants
were exercised at $5.00 per share. The remaining warrants expired in 1998.
In December 1995, the Company sold 792,500 shares of Series B convertible
preferred stock at $5.00 per share in a private placement for $3,962,500 less
related costs of $435,875. Holders of shares of the Series B convertible
preferred stock also received warrants to purchase 264,175 shares of the
Company's common stock at $9.50 per share. The warrants originally expired in
December 1998. In December 1998, the Company extended the exercise period to
January 1999 and repriced the warrants to $6.00 per share. Contingent upon
exercising, the holders would also receive additional warrants to purchase an
equal number of shares of common stock at $6.00 per share. In January 1999,
warrants to purchase 87,668 shares of common stock were exercised at $6.00 per
share, resulting in net proceeds to the Company of $485,407. The remaining
176,507 warrants expired in January 1999. An additional 87,668 warrants at $6.00
per share were issued to the holders that exercised. These additional warrants
originally expired in December 1999, but the Company extended the exercise
period to June 2000.
In December 1995, the Company also issued warrants to the placement agent to
purchase 79,250 shares of the Company's common stock at $5.00 per share. The
warrants remain outstanding and are exercisable for five years from the date of
grant. The Company issued additional warrants to the placement agent to purchase
26,418 shares of the Company's common stock at $9.50 per share, conditional upon
the exercise of the previous warrants issued to the placement agent. The
conditional warrants were not exercised and expired in 1998.
In January 1997, the Company converted all of its outstanding Series A and
Series B preferred stock into an equivalent number of shares of issued and
outstanding common stock.
During February through December 1999, options were exercised to purchase
131,200 shares of common stock at prices ranging from $3.00 to $4.7625 per
share. This resulted in net proceeds to the Company of $408,710.
In March 1999, the Company sold 293,750 shares of common stock in a private
placement for $1,175,000 less related costs of $17,500. Holders of the common
stock also received warrants to purchase 146,875 shares of common stock for
$5.00 per share. All warrants remain outstanding and expire in March 2001.
In December 1999, the Company sold 995,285 shares of common stock for $3,483,498
less related costs of $338,800. Holders of the common stock also received
warrants to purchase 497,643 shares of common stock for $5.50 per share. All
warrants remain outstanding and expire in December 2001.
In January 2000, the Company also sold 13,000 shares of common stock for
$45,500. Holders of the common stock also received warrants to purchase 6,500
shares of common stock for $5.50 per share. All warrants remain outstanding and
expire in January 2002.
Also in January 2000, options were exercised to purchase 5,333 shares of common
stock at $4.7625 per share. This resulted in net proceeds to the Company of
$25,398.
Page F-8
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements
December 31, 1999
5. STOCK OPTIONS
The Company has one stock option plan, the 1991 Stock Plan, under which selected
employees and non-employees may be granted incentive and non-qualified options
to purchase common stock of the Company. The options granted are exercisable
over a period of no longer than ten years and are granted at the higher of the
fair market value of the Company's common stock or a ten-day rolling average of
the fair market value of the common stock as of the date of grant.
The following table summarizes the stock option activity for the plan:
<TABLE>
<CAPTION>
STOCK OPTIONS WEIGHTED AVERAGE
SHARES AVAILABLE OUTSTANDING UNDER EXERCISE
FOR GRANT THE PLAN PRICE PER SHARE
--------------------------------------------------------
<S> <C> <C> <C>
Balance December 31, 1996 450,421 825,579 $3.95
Options granted (461,065) 461,065 4.07
Options exercised -- (10,069) 3.47
Options canceled 249,931 (249,931) 3.13
-------------------------------------
Balance December 31, 1997 239,287 1,026,644 4.19
Amendment to Plan 140,000 -- --
Options granted (508,167) 508,167 4.53
Options exercised -- (82,800) 3.41
Options canceled 499,580 (499,580) 3.94
-------------------------------------
Balance December 31, 1998 370,700 952,431 4.54
Options granted (251,000) 251,000 4.26
Options exercised -- (131,200) 3.12
Options canceled 29,300 (29,300) 3.00
-------------------------------------
Balance December 31, 1999 149,000 1,042,931 $4.68
=====================================
</TABLE>
The weighted average fair value of options granted in 1997, 1998 and 1999 was
$2.84, $3.79 and $2.62, respectively. The exercise price of options outstanding
at December 31, 1999 ranged from $3.00 to $11.25 per share, as summarized in the
following table:
<TABLE>
<CAPTION>
SHARES OUTSTANDING SHARES EXERCISABLE
----------------------------------------------- ------------------------------
WEIGHTED
SHARES AVERAGE WEIGHTED WEIGHTED
OUTSTANDING AT REMAINING AVERAGE NUMBER OF AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE PRICE SHARES EXERCISE PRICE
EXERCISE PRICE 1999 LIFE PER SHARE EXERCISABLE PER SHARE
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.00 to $ 5.00 802,686 8.8 years $ 4.15 511,851 $ 4.15
5.01 to 8.00 212,745 8.0 years 5.99 211,078 6.00
8.01 to 11.25 27,500 3.0 years 10.35 27,500 10.35
----------- -----------
Total 1,042,931 750,429
=========== ===========
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No.
Page F-9
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements
December 31, 1999
5. STOCK OPTIONS (CONTINUED)
123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1997, 1998 and 1999, respectively: risk-free interest rates
ranging from 5.38% to 6.30%; volatility factors of the expected market price of
the Company's common stock ranging from .774 to .851 and a weighted average
expected life of the option of five to seven years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which vest by one-third each year from the date of
the grant and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions. Because the Company's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
1997 1998 1999
---------------------------------------------
Pro forma net loss $(2,258,579) $(3,079,739) $(2,964,845)
Pro forma net loss per share $(.51) $(.66) $(.56)
These pro forma amounts may not be indicative of future years' amounts since the
Statement provides for a phase-in of option values beginning with those granted
in 1995.
6. COMMITMENTS
The Company moved to a new location in Minneapolis in October 1999 and entered
into a new building lease agreement that has a term extending through January
2003. This lease requires annual base rents of $94,581, $101,772, $102,024 and
$8,502, plus a sharing of certain expenses, for the years 2000, 2001, 2002 and
2003, respectively.
The Company was unable to terminate the existing lease agreement for the
previous facility and is under obligation for this facility through October
2001. Since the previous facility has no future benefit to the Company and there
is no actual or probable sublease income to offset the rent expense, the Company
has recognized an expense of $95,886 in the current year related to payments for
the remaining term of the lease. The portion payable in 2001 is recorded as
long-term lease commitment. The Company also expensed all leasehold improvements
related to this facility in the current year.
Various other equipment operating leases have been entered into and expire
during future years.
Page F-10
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements
December 31, 1999
6. COMMITMENTS (CONTINUED)
Future lease commitments are as follows:
2000 $104,164
2001 110,537
2002 104,000
2003 8,502
------------
Total $327,203
============
The Company incurred total lease and rental expenses of $67,000, $74,000 and
$106,600 for the years ended December 31, 1997, 1998 and 1999, respectively.
The Company has a license agreement with Massachusetts Institute of Technology
(MIT) for the use of certain patents. Under terms of the agreement, the Company
has agreed to pay $50,000 a year through October 2003 and $30,000 a year
thereafter until the expiration of the patent rights. The agreement can be
terminated by MIT if the monthly payments are not made within 30 days. Under the
terms of this agreement, the Company paid $50,000 annually in 1997 through 1999.
7. ACCRUED CLINICAL RESEARCH FEES
The Company is conducting ongoing multi-center clinical studies using the
Virtual Biopsy(TM) System (VBS) in an attempt to show that the VBS is a
minimally-invasive diagnostic tool used to detect and differentiate among
normal, pre-cancerous and cancerous tissues without physically removing tissue
from the body. During 1995 through 1998, the Company entered into various
clinical testing agreements with domestic hospitals to conduct research using
the VBS. Under the terms of these agreements, the Company had a maximum
commitment of $374,000 for clinical research testing related project costs as of
December 31, 1999. Some of these costs have already been paid by the Company and
will continue to be paid. As of December 31, 1998 and 1999, the Company had
accrued for $162,400 and $47,399 of these clinical research fees, respectively.
8. INCOME TAXES
The tax effect of the Company's deferred tax assets is as follows:
DECEMBER 31
1998 1999
---------------------------------
Net operating loss carryforward $ 16,761,000 $ 17,567,000
Accrued liabilities 106,000 108,000
Inventory reserve -- 3,000
Tax credits 872,000 903,000
---------------------------------
17,739,000 18,581,000
Valuation allowance (17,739,000) (18,581,000)
---------------------------------
$ -- $ --
=================================
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $48,798,000 that expire at various times through the year 2019. In
addition, the Company has research and
Page F-11
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements
December 31, 1999
8. INCOME TAXES (CONTINUED)
development tax credits that expire at various times through 2014. As a result
of previous stock transactions, the Company's ability to utilize its net
operating loss carryforwards to offset future taxable income is subject to
certain limitations under Section 382 of the Internal Revenue Code due to
changes in equity ownership of the Company.
9. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) profit sharing and savings plan covering substantially
all employees. The plan allows employees to defer up to 15% of their annual
earnings. The Company will match 50% of the first 6% of the employee
contributions. The contributions by the Company totaled approximately $17,000,
$21,000 and $14,300 for 1997, 1998 and 1999, respectively.
10. NOTE PAYABLE TO RELATED PARTY
The Company issued a convertible demand note for $600,005 on December 30, 1999
with a related party. A member of the board of directors of the Company is also
a member of the board of directors of the payee. The note bears an annual
interest rate of 6%, which is payable upon maturity, demand or conversion. The
note is payable upon the demand of the payee at any time after March 31, 2000
and matures on June 30, 2000. The note may be converted at the option of the
holder at any time or will automatically be converted upon the approval of the
Company's common stock for listing on the NASDAQ. The note will be converted
into 171,430 shares of the Company's common stock with warrants to purchase
85,715 shares of common stock at $5.50 per share. These warrants are exercisable
at any time and expire two years from the date of conversion.
11. LITIGATION
In September 1998, the Company was served with a lawsuit from a former
consultant of the Company. The lawsuit claims that the plaintiff was entitled to
receive options for 50,000 shares of the Company's common stock at an exercise
price of $2.50 per share, for the successful completion of a proposed private
placement financing. The Company has contended that the proposed financing did
not occur. The Company is unable at this time to evaluate the likelihood of an
unfavorable outcome or to estimate any amount of liability associated with the
proceedings.
12. SUBSEQUENT EVENTS
In January through March 17, 2000, option holders exercised their options to
purchase 23,333 shares of common stock at prices ranging from $4.00 to $7.05 per
share. This resulted in net proceeds to the Company of $132,838.
Page F-12
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ ----------------------
3.3 Articles of Incorporation, as amended. (Incorporated by reference to
the Company's Annual Report on Form 10-KSB, Exhibit 3.1, for the year
ended December 31, 1996.)
3.4 Bylaws, as amended. (Incorporated by reference to the Company's Annual
Report on Form 10-KSB, Exhibit 3.2, for the year ended December 31,
1995.)
4.1 Specimen Form of the Common Stock Certificate (previously filed)
5.1 Opinion of Chappell White LLP (filed herewith)
10.1 1991 Stock Plan adopted by the Company's Board of Directors on July 11,
1991 and shareholders on January 30, 1992. (Incorporated by reference
to the Company's Annual Report on Form 10-K, Exhibit 10.12, for the
year ended December 31, 1991.)
10.2 Amendment to 1991 Stock Plan adopted by the Company's Board of
Directors on July 11, 1991 and shareholders on January 30, 1992.
(Incorporated by reference to the Company's Form 8-K Report filed with
the Securities and Exchange Commission on or about February 3, 1992.)
10.3 Amendment to 1991 Stock Plan adopted by the Company's shareholders on
June 28, 1995. (Incorporated by reference to the Company's Registration
Statement on Form S-8, Commission File No. 033-63047, as filed on
September 28, 1995.)
10.4 Amendment to 1991 Stock Plan adopted by the Company's Board of
Directors on October 4, 1995. (Incorporated by reference to the
Company's definitive Proxy Statement for its 1996 Annual Meeting of
Shareholders.)
10.5 Amendment to 1991 Stock Plan adopted by the Company's shareholders on
March 28, 1996. (Incorporated by reference to the Company's
Registration Statement on Form S-8, Commission File No. 333-4393, as
filed on May 23, 1996.)
10.6 Amendment to 1991 Stock Plan as it pertains to Section 5(k) of the Plan
regarding Directors options, adopted by the Company's Board of
Directors on October 9, 1996. (Incorporated by reference to the
Company's Annual Report on Form 10-KSB, Exhibit 10.10, for the year
ended December 31, 1996.)
10.7 Amendment to 1991 Stock Plan as it pertains to Section 3 of the Plan,
adopted by the Company's Board of Directors on March 9, 1998.
(Incorporated by reference to the Company's Annual Report of Form 10-K
for the year ended December 31, 1997.)
10.8 Self-Insurance Trust Agreement between the Company and Richfield Bank
and Trust Co., as trustee dated March 5, 1987. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1986.)
10.9 Severance (Change in Control) Agreement between the Company and Chester
E. Sievert, Jr. dated May 21, 1997. (Incorporated by reference to the
Company's Annual Report of Form 10-K for the year ended December 31,
1997.)
10.10 Five-Year Lease Agreement between the Company and St. Paul Properties,
Inc. dated October 10, 1996 (Incorporated by reference to the Company's
Annual Report on Form 10-KSB, Exhibit 10.17, for the year ended
December 31, 1996.)
10.11 Clinical Research Agreement between The General Hospital Corporation,
doing business as Massachusetts General Hospital, and the Company dated
June 1, 1995. (Incorporated by reference to the Company's Annual Report
on Form 10-KSB, Exhibit 10.15, for the year ended December 31, 1995.)
10.12 Manufacturing and Sales Agreement, dated June 23, 1997, between
Portlyn Corporation and the Company. (Incorporated by reference to
Exhibit 10.28 to Amendment No. 1 to the Company's Registration
Statement on Form SB-2, dated October 7, 1998, Commission File No.
333-59395.)
10.13 Lease Agreement between the Company and Urologix, Inc. dated September
23, 1999 (Incorporated by reference to the Company's Annual Report on
Form 10-KSB, Exhibit 10.23, for the year ended December 31, 1999.)
10.14 Form of Warrant issued to the selling agents for our Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock,
(Incorporated by reference to the Company's Form S-3 Registration
Statement, Registration # 333-01149, as filed on February 22, 1996.)
10.15 Form of Warrant issued to investors who exercised their amended
warrants in January 1999 (Incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration # 333-84213, as filed
on April 14, 2000).
<PAGE>
10.16 Form of Warrant issued to Qualified Lenders who exercised their
warrants in March 1999 (Incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration # 333-84213, as filed
on April 14, 2000).
10.17 Form of Warrant issued to investors in the March 1999 private placement
of the Company's common stock (Incorporated by reference to the
Company's Registration Statement on Form SB-2, Registration #
333-84213, as filed on April 14, 2000).
10.18 Form of Warrant issued to investors in the December 1999 private
placement of the Company's common stock (Incorporated by reference to
the Company's Registration Statement on Form SB-2, Registration #
333-84213, as filed on April 14, 2000).
10.19 Settlement Agreement between Paul F. Gibson and SpectraScience, Inc.
dated October 21, 1994 (filed herewith).
10.20 Findings of Fact, Conclusions of Law, and Order for Judgement in the
case of Paul Gibson v SpectraScience, Inc. dated June 2, 2000 (filed
herewith).
23.1 Consent of Independent Auditors, (Incorporated by reference to the
company's Annual Report on Form 10-KSB, Exhibit 23.1, for the year
ended December 31, 1999)
5.1 Consent of Chappell White LLP (included in Exhibit 5.1)
24.1 Powers of Attorney, filed herewith.
