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EX-23.2 - SPECTRASCIENCE INC | v173277_ex23-2.htm |
EX-23.1 - SPECTRASCIENCE INC | v173277_ex23-1.htm |
Registration
No. 333-164430
As
filed with the U.S. Securities and Exchange Commission on February 8,
2010
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
Pre-Effective Amendment No. 2
to
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
SPECTRASCIENCE,
INC.
(Exact
name of registrant as specified in its charter)
Minnesota
|
3845
|
94-3096597
|
(State
or other jurisdiction of
incorporation
or organization)
|
(Primary
Standard Industrial
Classification
Code Number
|
(IRS
Employer Identification
Number)
|
11568
Sorrento Valley Road, Suite 11
San
Diego, California 92121
(858)
847-0200
(Address
and telephone number of registrant’s principal executive offices)
Jim
Hitchin
Chairman
and Chief Executive Officer
11568
Sorrento Valley Road, Suite 11
San
Diego, California 92121
(858)
847-0200
(Name,
address and telephone number of agent for service)
With a
copy to:
Steven
Dickinson, Esq.
Fredrikson
& Byron P.A.
200 South
Sixth Street, Suite 4000
Minneapolis,
MN 55402
PH: (612)
492-7331
FAX:
(612) 492-7077
Approximate date of commencement of
proposed sale to the public: From time to time after
this Registration Statement becomes effective.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, as
amended, check the following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please 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. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
CALCULATION
OF REGISTRATION FEE
Title Of Each Class
Of Securities To Be Registered
|
Amount
To Be
Registered (1)
|
Proposed
Maximum
Offering Price
Per Share
|
Proposed
Maximum
Aggregate
Offering
Price
|
Amount
Of
Registration Fee(4)
|
||||||||||
Common
Stock, underlying Series B Convertible
Preferred Stock, par value $0.01
per
share
|
25,000,000 shares
|
$
|
0.42
|
(2)
|
$
|
10,500,000
|
$
|
748.65
|
||||||
Common
Stock underlying warrants held by current shareholders subject to this
offering
|
12,500,000 shares
|
$
|
0.42
|
(3)
|
$
|
5,250,000
|
$
|
374.33
|
||||||
Common
Stock underlying warrants held by selling agents subject to this
offering
|
2,500,000 shares
|
$
|
0.42
|
(3)
|
$
|
1,050,000
|
74.87
|
|||||||
Common
Stock
|
249,213 shares
|
$
|
0.42
|
(2)
|
$
|
104,669
|
$
|
7.46
|
||||||
TOTAL
|
40,249,213 shares
|
$
|
0.42
|
$
|
16,904,669
|
$
|
1,205.31
|
(1)
|
The shares of our Common Stock
being registered hereunder are being registered for sale by the Selling
Shareholders, as defined in the accompanying
Prospectus.
|
(2)
|
Estimated solely for the purpose
of calculating the registration fee pursuant to Rule 457(c) under the
Securities Act of 1933. For the purposes of this table, we have used the
average high and low sales price of our Common Stock on January 29,
2010.
|
(3)
|
Estimated
solely for the purpose of calculating the registration fee pursuant to
Rule 457(g) under the Securities Act of 1933, based upon the average high
and low sales price of our Common Stock on January 29,
2010.
|
(4)
|
Previously
paid.
|
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 this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
EXPLANATORY
NOTE
Spectrascience,
Inc. has prepared this pre-effective amendment No. 2 to its registration
statement on Form S-1 solely for the purpose of filing with the Securities
and Exchange Commission an executed signature page to the previously filed
registration statement on Form S-1, which was inadvertantly filed without
conformed signatures.
SUBJECT
TO COMPLETION, DATED FEBRUARY 8, 2010.
The
information in this Prospectus is not complete and may be changed. These
securities may not be sold nor may any offers to buy be accepted until the
registration statement filed with the Securities and Exchange Commission is
effective. This Prospectus is not an offer to sell these securities and we are
not soliciting offers to buy these securities in any state where the offer or
sale is not permitted.
PROSPECTUS
SPECTRASCIENCE,
INC.
40,249,213
Shares of Common Stock
This
Prospectus relates to the sale of up to 40,249,213 shares of SpectraScience,
Inc. common stock, par value $0.01 per share, the (“Common Stock”), which
include:
|
·
|
25,000,000
shares of Common Stock underlying a like number of shares of Series B
Convertible Preferred Stock;
|
|
·
|
12,500,000
shares of Common Stock underlying Common Stock purchase warrants at an
exercise price of $0.30 per share;
and
|
|
·
|
2,500,000 shares of Common
Stock underlying Common Stock purchase warrants at an exercise price of
$0.35 per share;
|
|
·
|
249,213
shares of Common Stock issued as a cumulative dividend on the Series B
Convertible Preferred Stock at December 31,
2009.
|
These
securities will be offered for sale by the selling shareholders identified in
this prospectus (the “Selling Shareholders”) in accordance with the methods and
terms described in the section of this prospectus titles “Plan of
Distribution”.
We will
not receive any of the proceeds from the sale of the shares. However, we may
receive up to $4,625,000 upon the exercise of the warrants. If some or all of
the warrants are exercised for cash, the money we receive will be used for
general corporate purposes. We will pay all expenses incurred in connection with
the offering described in this prospectus, with the exception of the brokerage
expenses, fees, discounts and commissions which will all be paid by the Selling
Shareholders.
Our
Common Stock is registered under Section 12(g) of the Securities Exchange Act of
1934 and quoted on the Over-The-Counter Bulletin Board (“OTCBB”) under the
symbol “SCIE.OB” On January 29, 2010, the last reported sale price for our
Common Stock as reported on the OTC BB was $0.40 per share.
Investing
in the Common Stock involves certain risks. See "Risk Factors" beginning on page
5 for a discussion of these risks.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this Prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
The date
of this Prospectus is ____________, 2010
2
TABLE
OF CONTENTS
Page No.
|
||
PROSPECTUS
SUMMARY
|
4
|
|
SUMMARY
OF THE OFFERING
|
4
|
|
RISK
FACTORS
|
4
|
|
FORWARD-LOOKING
STATEMENTS
|
13
|
|
THE
UNITS OFFERING TRANSACTION
|
13
|
|
USE
OF PROCEEDS
|
14
|
|
DESCRIPTION
OF BUSINESS
|
14
|
|
DESCRIPTION
OF PROPERTIES
|
24
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
25
|
|
MANAGEMENT
|
29
|
|
DIRECTOR
COMPENSATION
|
31
|
|
EXECUTIVE
COMPENSATION
|
32
|
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
34
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
35
|
|
LEGAL
PROCEEDINGS
|
35
|
|
DESCRIPTION
OF SECURITIES
|
35
|
|
MARKET
FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
|
36
|
|
THE
SELLING SHAREHOLDERS
|
38
|
|
PLAN
OF DISTRIBUTION
|
41
|
|
TRANSFER
AGENT
|
41
|
|
REPORTS
TO SECURITY HOLDERS
|
41
|
|
LEGAL
MATTERS
|
41
|
|
EXPERTS
|
42
|
|
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
|
42
|
|
WHERE
YOU CAN FIND MORE INFORMATION
|
42
|
|
FINANCIAL
STATEMENTS
|
43
|
|
PART
II. INFORMATION NOT REQUIRED IN PROSPECTUS
|
70
|
|
ITEM
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
|
70
|
|
ITEM
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
|
70
|
|
ITEM
15. RECENT SALES OF UNREGISTERED SECURITIES
|
71
|
|
ITEM
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
73
|
|
ITEM
17. UNDERTAKINGS
|
74
|
|
SIGNATURES
|
76
|
3
PROSPECTUS
SUMMARY
This
summary highlights important information about our Company and business. Because
it is a summary, it may not contain all of the information that is important to
you. To understand this offering fully, you should read this entire Prospectus
and the financial statements and related notes included in this Prospectus
carefully, including the “Risk Factors” section. Unless the context requires
otherwise, “WE,” “US,” “OUR,” and the “COMPANY” and similar terms collectively
refer to SpectraScience, Inc. and its wholly owned subsidiary Luma Imaging
Corporation.
The
Company
SpectraScience,
Inc. (“SpectraScience”) is an early revenue stage medical device company focused
on developing and marketing devices for the non-invasive detection of cancerous
and pre-cancerous tissue.
The
Company has developed and received FDA approval to market a proprietary,
minimally invasive technology that optically illuminates tissue in real-time to
distinguish between normal, pre-cancerous or cancerous cells without the need to
remove the subject cell tissue from the body. The WavSTAT® Optical Biopsy System
(“WavSTAT”) operates by using cool, safe ultraviolet laser light to optically
illuminate and analyze tissue, enabling the physician to make an instant
diagnosis during endoscopy when screening for cancers and, if warranted, to
begin immediate treatment during the same procedure. The WavSTAT is FDA approved
for colon cancer detection.
In 2007,
the Company acquired all of the issued and outstanding capital stock of Luma
Imaging Corporation (“LUMA”) and now operates LUMA as a wholly owned subsidiary
of the Company. LUMA had acquired its assets from a predecessor company that had
developed, and received FDA approval for, a non-invasive diagnostic imaging
system that can detect cervical cancer precursors and which utilizes an
underlying technology that is similar to that of the WavSTAT System. The
addition of the LUMA technology to the Company’s existing technology provides
the Company with a broad suite of fluorescence-based intellectual property and
know-how. The LUMA Cervical Imaging System received FDA approval in March
2006.
Corporate
Information
SpectraScience
was incorporated in the state of Minnesota on May 4, 1983 as GV Medical, Inc.
(“GV Medical”). The Company subsequently changed its name to
SpectraScience, Inc. and does business solely under that name. Our
principal executive offices are located at 11568 Sorrento Valley Road, Suite 11,
San Diego, California 92121. Our telephone number is (858) 847-0200. Our
website can be accessed at www.spectrascience.com. Information on our website is
not a part of this Prospectus.
SUMMARY
OF THE OFFERING
This
Prospectus relates to the sale of up to 40,249,213 shares of our Common Stock,
including 25,000,000 shares of Common Stock underlying a like number of Series B
Convertible Preferred Shares sold in a private placement, 15,000,000 shares
underlying warrants held by Selling Shareholders and Agents and 249,213 shares
of Common Stock issued to the Selling Shareholders as a cumulative dividend. All
Shares sold under this Prospectus are being sold by the Selling Shareholders;
however, should the holders of the warrants exercise the warrants in cash, the
Company would receive approximately $4,625,000.
RISK
FACTORS
You should
carefully consider the risks described below before purchasing our Common Stock.
Our most significant risks and uncertainties are described below; however, they
are not the only risks we face. If any of the following risks actually occur,
our business, financial condition, or results of operations could be materially
adversely affected, the price of our Common Stock could decline, and you may
lose all or part of your investment therein. You should acquire shares of our
Common Stock only if you can afford to lose your entire investment.
RISKS
RELATED TO OUR BUSINESS
WE HAVE A
LIMITED OPERATING HISTORY WITH SIGNIFICANT LOSSES AND EXPECT LOSSES TO CONTINUE
FOR THE FORESEEABLE FUTURE.
We have
yet to establish any history of profitable operations. We have incurred annual
operating losses of $5,271,332 and $3,020,588, respectively, during the past two
fiscal years of operation, and an operating loss of $2,983,231 in the nine
months ended September 30, 2009. As a result, at September 30, 2009 we had an
accumulated deficit of $15,540,404. We have incurred net losses from continuing
operations of $5,144,902 and $2,974,585 for the fiscal years ending 2008 and
2007 and net losses from continuing operations of $2,983,252 in the nine months
ended September 30, 2009. Our revenues have not been sufficient to sustain our
operations. We expect that our revenues will not be sufficient to sustain our
operations for the foreseeable future. Our failure to generate meaningful
revenues and ultimately profits from the WavSTAT and LUMA systems and
applications of our technology could force us to raise additional capital which
may not be available on acceptable terms. This could ultimately reduce or
suspend our operations and ultimately could cause us to go out of business. Our
profit67ility will require the successful commercialization of our imaging
systems and no assurances can be given when this will occur or if we will ever
be profitable.
4
WE WILL
REQUIRE ADDITIONAL FINANCING TO SUSTAIN OUR OPERATIONS AND WITHOUT IT WE MAY NOT
BE ABLE TO CONTINUE OPERATIONS
At
September 30, 2009, we had a working capital balance of $1,502,070. We had an
operating cash flow deficit of $3,811,212 and $1,459,811 for the fiscal years
ended December 31, 2008 and 2007, respectively, and an operating cash flow
deficit of $1,782,379 for the nine-month period ending September 30, 2009. From
September 30, 2009 until the date of this Prospectus, the Company sold
16,660,000 shares of Series B Convertible Preferred Stock including common stock
purchase warrants to purchase 8,330,000 shares at $0.30 per share and common
stock purchase warrants to purchase 1,666,000 shares at $0.35 per share. The
Company received gross proceeds of $3,332,000 from the sale and net proceeds of
$2,876,360 after payment of $455,640 in fees.
The
Company also has in place, but has not yet utilized, a $6.0 million Common Stock
Purchase Agreement (“Purchase Agreement”) with Fusion Capital Fund II LLC
(“Fusion Capital”). We only have the right to receive $25,000 every two business
days under the Purchase Agreement with Fusion Capital unless our stock price
equals or exceeds $0.30, in which case we can sell greater amounts to Fusion
Capital as the price of our Common Stock increases. Fusion Capital does
not have the right nor the obligation to purchase any shares of our Common Stock
on any business day that the market price of our Common Stock is less than
$0.15. We have previously registered 13,300,000 shares for sale by Fusion
Capital pursuant to a previously filed prospectus (11,558,974 total registered
shares to be issued and sold under the Purchase Agreement, plus 100,000 expense
shares, 1,094,017 initial commitment shares and 547,009 allocable commitment
shares). The selling price of our Common Stock to Fusion Capital will have to
average approximately $0.52 per share for us to receive the maximum proceeds of
$6.0 million. Assuming a purchase price of $0.40 per share (the closing
sale price of the Common Stock on January 29, 2010) and the purchase by Fusion
Capital of the full 11,558,974 shares remaining under the Purchase Agreement,
proceeds to us would only be $4,623,590 unless we choose to register more shares
which we may sell to Fusion Capital, which we have the right, but not the
obligation, to do.
The
extent to which we will rely on Fusion Capital as a source of funding will
depend on a number of factors including, the prevailing market price of our
Common Stock and the extent to which we are able to secure working capital from
other sources. If obtaining additional financing from Fusion Capital were to
prove unavailable or prohibitively dilutive and if we are unable to
commercialize and sell enough of our products, we will need to secure another
source of funding in order to satisfy our working capital needs. Even if
we are able to access the full $6.0 million under the Purchase Agreement with
Fusion Capital, we may still need additional capital to fully implement our
business, operating and development plans. Should the financing we require
to sustain our working capital needs be unavailable or prohibitively expensive
when we require it, the consequences could have a material adverse effect on our
business, operating results, financial condition and prospects.
THE SALE
OF OUR SERIES B CONVERTIBLE PREFERRED STOCK AND ITS SUBSEQUENT CONVERSION WILL
CAUSE DILUTION AND THE SALE OF THE SHARES OF COMMON STOCK ACQUIRED BY THE
HOLDERS OF OUR SERIES B CONVERTIBLE PREFERRED STOCK COULD CAUSE THE PRICE OF OUR
COMMON STOCK TO DECLINE
In
connection with the conclusion of our sale of Series B Convertible Preferred
Stock, we sold a total of 25,000,000 shares of Series B Convertible Preferred
Stock at $0.20 per share, convertible into a like number of shares of Common
Stock. In addition, we issued common stock purchase warrants to purchase an
additional 12,500,000 shares of Common Stock at $0.30 per share, common stock
purchase warrants to purchase an additional 2,500,000 shares of Common Stock at
$0.35 per share and 249,213 shares of Common Stock in payment of a cumulative
dividend on the Series B Convertible Preferred Stock. All 40,249,213 shares
registered for the holders in this offering are expected to be freely tradable
and can be sold once this registration statement is effective. Depending upon
market liquidity at the time, a sale of shares under this offering at any given
time could cause the trading price of our Common Stock to decline. The sale of a
substantial number of shares of our Common Stock under this offering, or
anticipation of such sales, could make it more difficult for us to sell equity
or equity-related securities in the future at a time and at a price that we
might otherwise wish to effect sales.
WE HAVE
RECEIVED AN OPINION FROM OUR AUDITORS REGARDING OUR POSSIBLE FUTURE INABILITY TO
CONTINUE AS A GOING CONCERN.
Our
independent auditors noted in their report accompanying our financial statements
for our fiscal year ended December 31, 2008 that we have incurred losses and had
negative cash flows from inception and that a significant amount of additional
capital will be necessary to market our product to the point at which we become
commercially viable, and stated that those conditions raised substantial doubt
about our ability to continue as a going concern. We cannot assure you that our
business plans will be successful. This opinion about our ability to continue as
a going concern could affect our ability to obtain additional financing at
favorable terms, if at all, as such an opinion could cause investors to lose
faith in our long term prospects. If we cannot continue as a going concern, our
shareholders could lose their entire investment in our common
shares.
5
WE MAY
FACE INTENSE COMPETITION FROM COMPANIES THAT HAVE GREATER FINANCIAL, PERSONNEL
AND RESEARCH AND DEVELOPMENT RESOURCES.
Competitive
forces may impact our projected growth and ability to generate revenues and
profits, which would have a negative impact on our business and the value of
your investment. Our competitors may be developing products which compete with
the WavSTAT and LUMA Systems. Our commercial opportunities would then be reduced
or eliminated should our competitors develop and market products for any of the
diseases that we target that are more effective or are less expensive than the
products or product candidates we are developing.
Even if
we are successful in developing effective WavSTAT and LUMA Systems, and we
obtain FDA and other regulatory approvals necessary for commercializing them,
our products may not compete effectively with other successful products.
Researchers are continually learning more about diseases, which may lead to new
technologies and tools for analysis.
Our
competitors include fully integrated medical device companies, universities and
public and private research institutions. Many of the organizations competing
with us may have substantially greater capital resources, larger research and
development staffs and facilities, greater experience in product development and
in obtaining regulatory approvals, and greater marketing capabilities than we
do.
The
market for medical devices is intensely competitive. Many of our potential
competitors have longer operating histories, greater name recognition, more
employees, and significantly greater financial, technical, marketing, public
relations, and distribution resources than we have. This intense competitive
environment may require us to make changes in our products, pricing, licensing,
services or marketing to develop, maintain and extend our current technology.
Price concessions or the emergence of other pricing or distribution strategies
of competitors may diminish our revenues, adversely impact our margins or lead
to a reduction in our market share, any of which may harm our
business.
OUR
WavSTAT AND LUMA SYSTEMS TECHNOLOGY MAY BECOME OBSOLETE.
Our
WavSTAT and LUMA Systems products may be rendered unmarketable by new scientific
or technological developments where new treatment alternatives are introduced
that are more effective or more economical than our WavSTAT and LUMA System
products. Any one of our competitors could develop a more effective product
which would render our technology obsolete.
WE ARE
DEPENDENT FOR OUR SUCCESS ON A KEY EXECUTIVE OFFICER.
Our
success depends to a critical extent on the continued services of our Chief
Executive Officer, Jim Hitchin. If we lost this key executive officer, we would
be forced to expend significant time and money in the pursuit of a replacement,
which would result in both a delay in the implementation of our business plan
and the diversion of limited working capital. We can give you no assurance that
we could find a satisfactory replacement for this key executive officer at all,
or on terms that are not unduly expensive or burdensome. We do not have an
employment agreement with Mr. Hitchin and his employment is severable by either
party at will.
OUR
INABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL COULD IMPEDE OUR ABILITY TO
GENERATE REVENUES AND PROFITS AND TO OTHERWISE IMPLEMENT OUR BUSINESS PLAN AND
GROWTH STRATEGIES.
We
currently have a staff of nine full-time employees, consisting of, among others,
our Chief Executive Officer, Chief Financial Officer, Director of International
Sales, Operations Manager and Director of Engineering, as well as administrative
employees and other personnel employed on a contract basis. Although we believe
that these employees, together with the consultants currently engaged by the
Company, will be able to handle most of our additional administrative, research
and development and business development in the near term, we will nevertheless
be required over the longer-term to hire highly skilled managerial, scientific
and administrative personnel to fully implement our business plan and growth
strategies. We cannot assure you that we will be able to engage the services of
such qualified personnel at competitive prices or at all, particularly given the
risks of employment attributable to our limited financial resources and lack of
an established track record.
WE PLAN
TO GROW VERY RAPIDLY, WHICH WILL PLACE STRAINS ON OUR MANAGEMENT TEAM AND OTHER
COMPANY RESOURCES TO BOTH IMPLEMENT MORE SOPHISTICATED MANAGERIAL, OPERATIONAL
AND FINANCIAL SYSTEMS, PROCEDURES AND CONTROLS AND TO TRAIN AND MANAGE THE
PERSONNEL NECESSARY TO IMPLEMENT THOSE FUNCTIONS. OUR INABILITY TO MANAGE OUR
GROWTH COULD IMPEDE OUR ABILITY TO GENERATE REVENUES AND PROFITS AND TO
OTHERWISE IMPLEMENT OUR BUSINESS PLAN AND GROWTH STRATEGIES, WHICH WOULD HAVE A
NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF YOUR INVESTMENT.
We will
need to significantly expand our operations to implement our longer-term
business plan and growth strategies. We will also be required to manage multiple
relationships with various strategic partners, technology licensors, customers,
manufacturers and suppliers, consultants and other third parties. This expansion
and these expanded relationships will require us to significantly improve or
replace our existing managerial, operational and financial systems, procedures
and controls; to improve the coordination between our various corporate
functions; and to manage, train, motivate and maintain a growing employee base.
The time and costs to effectuate these steps may place a significant strain on
our management personnel, systems and resources, particularly given the limited
amount of financial resources and skilled employees that may be available at the
time. We cannot assure you that we will institute, in a timely manner or at all,
the improvements to our managerial, operational and financial systems,
procedures and controls necessary to support our anticipated increased levels of
operations and to coordinate our various corporate functions, or that we will be
able to properly manage, train, motivate and retain the anticipated increased
number of employees.
6
THE
COMPANY MAY HAVE DIFFICULTY IN DEVELOPING AND RETAINING AN EFFECTIVE SALES FORCE
OR IN OBTAINING EFFECTIVE DISTRIBUTION PARTNERS AND MAY NOT BE ABLE TO ACHIEVE
SUFFICIENT REVENUES TO EFFECT ITS BUSINESS PLAN
The
market for skilled sales and marketing personnel is highly competitive and
specialized. If we are unable to hire and retain skilled and knowledgeable sales
people it may negatively impact our ability to introduce our products or
generate revenue sufficient to affect our future business plans. In addition our
inability to develop business relationships with key technical distributors may
also negatively impact our ability to successfully market our
products.
THE
COMPANY MAY BE UNSUCCESSFUL IN COMMERCIALIZING THE LUMA ASSETS
With the
successful acquisition of the Luma Imaging Corporation’s stock in November 2007,
we continue to assess and redeploy its assets, primarily intellectual property,
to successfully commercialize the LUMA products. Our limited number of technical
and marketing personnel, and our limited budget, may be inadequate for
successful market development.
WE MAY
HAVE DIFFICULTY IN ATTRACTING AND RETAINING MANAGEMENT AND OUTSIDE INDEPENDENT
MEMBERS TO OUR BOARD OF DIRECTORS AS A RESULT OF THEIR CONCERNS RELATING TO
THEIR INCREASED PERSONAL EXPOSURE TO LAWSUITS AND SHAREHOLDER CLAIMS BY VIRTUE
OF HOLDING THESE POSITIONS IN A PUBLICLY-HELD COMPANY.
The
directors and management of publicly traded corporations are increasingly
concerned with the extent of their personal exposure to lawsuits and shareholder
claims, as well as governmental and creditor claims which may be made against
them, particularly in view of recent changes in securities laws imposing
additional duties, obligations and liabilities on management and directors. Due
to these perceived risks, directors and management are also becoming
increasingly concerned with the availability of directors and officers liability
insurance to pay on a timely basis the costs incurred in defending such claims.
We currently carry directors’ and officers’ liability insurance, but such
insurance is expensive and can be difficult to obtain. If we are unable to
obtain directors and officers liability insurance at affordable rates or at all
in the future, it may become increasingly more difficult to attract and retain
qualified outside directors to serve on our board of directors. As a
company with a limited operating history and limited resources, we will have a
more difficult time attracting and retaining management and outside independent
directors than a more established company due to these enhanced duties,
obligations and liabilities.
IF WE
FAIL TO COMPLY WITH EXTENSIVE REGULATIONS ENFORCED BY DOMESTIC AND FOREIGN
REGULATORY AUTHORITIES, THE COMMERCIALIZATION OF OUR PRODUCTS COULD BE PREVENTED
OR DELAYED.
Our
WavSTAT and LUMA Systems are subject to extensive government regulations related
to development, testing, manufacturing and commercialization in the United
States and other countries. The determination of when and whether a product is
ready for large scale purchase and potential use will be made by the government
through consultation with a number of governmental agencies, including the FDA,
the National Institutes of Health, and the Centers for Disease Control and
Prevention. Some of our product candidates are in the clinical stages of
development and have not received required regulatory approval from the FDA for
the esophageal or lung applications we hope to commercially market. The process
of obtaining and complying with FDA and other governmental regulatory approvals
and regulations is costly, time consuming, uncertain and subject to
unanticipated delays. Despite the time and expense incurred, regulatory approval
is never guaranteed. We also are subject to the following risks and obligations,
among others:
·
|
The
FDA may refuse to approve an application if they believe that applicable
regulatory criteria are not
satisfied;
|
·
|
The
FDA may require additional testing for safety and
effectiveness;
|
·
|
The
FDA may interpret data from pre-clinical testing and clinical trials in
different ways than us;
|
·
|
If
regulatory approval of a product is granted, the approval may be limited
to specific indications or limited with respect to its distribution;
and
|
7
·
|
The
FDA may change their approval policies and/or adopt new
regulations
|
Failure
to comply with these or other regulatory requirements of the FDA may subject us
to administrative or judicially imposed sanctions, including:
·
|
Warning
letters;
|
·
|
Civil
penalties;
|
·
|
Criminal
penalties;
|
·
|
Injunctions;
|
·
|
Product
seizure or detention;
|
·
|
Product
recalls; and
|
·
|
Total
or partial suspension of production
|
DELAYS IN
SUCCESSFULLY COMPLETING OUR CLINICAL TRIALS COULD JEOPARDIZE OUR ABILITY TO
OBTAIN REGULATORY APPROVAL OR MARKET OUR WavSTAT AND LUMA SYSTEM
CANDIDATES.
Our
business prospects will depend on our ability to complete clinical trials,
obtain satisfactory results, obtain required regulatory approvals and
successfully commercialize our WavSTAT and LUMA System product candidates.
Completion of our clinical trials, announcement of results of the trials and our
ability to obtain regulatory approvals could be delayed for a variety of
reasons, including:
·
|
Unsatisfactory
results of any clinical trial;
|
·
|
The
failure of principal third-party investigators to perform clinical trials
on our anticipated schedules; and
|
·
|
Different
interpretations of pre-clinical and clinical data, which could initially
lead to inconclusive results
|
OUR
DEVELOPMENT COSTS WILL INCREASE IF WE HAVE DELAYS IN ANY CLINICAL TRIAL OR IF WE
NEED TO PERFORM MORE OR LARGER CLINICAL TRIALS THAN PLANNED.
If the
delays are significant, or if any of our WavSTAT System or LUMA product
candidates do not prove to be safe or effective or do not receive required
regulatory approvals, our financial results and the commercial prospects for our
product candidates will be harmed. Furthermore, our inability to complete our
clinical trials in a timely manner could jeopardize our ability to obtain
regulatory approval.
THE
INDEPENDENT CLINICAL INVESTIGATORS THAT WE RELY UPON TO CONDUCT OUR CLINICAL
TRIALS MAY NOT BE DILIGENT, CAREFUL OR EFFICIENT, AND MAY MAKE MISTAKES IN THE
CONDUCT OF OUR CLINICAL TRIALS.
We depend
on independent clinical investigators to conduct our clinical trials. The
investigators are not our employees, and we cannot control the amount or timing
of resources that they devote to our product development programs. If
independent investigators fail to devote sufficient time and resources to our
product development programs, or if their performance is substandard, it may
delay FDA approval of our products. These independent investigators may also
have relationships with other commercial entities, some of which may compete
with us. If these independent investigators assist our competitors at our
expense, it could harm our competitive position.
OUR
PRODUCT DEVELOPMENT EFFORTS MAY NOT YIELD MARKETABLE PRODUCTS DUE TO UNFAVORABLE
RESULTS OF STUDIES OR TRIALS, FAILURE TO ACHIEVE REGULATORY APPROVALS OR MARKET
ACCEPTANCE, PROPRIETARY RIGHTS OF OTHERS OR MANUFACTURING ISSUES.
Our
success depends on our ability to successfully develop and obtain regulatory
approval to market new products. We expect that a significant portion of the
research that we will conduct will involve new and unproven technologies.
Development of a product requires substantial technical, financial and human
resources even if the product is not successfully completed.
8
Potential
products may appear to be promising at various stages of development yet fail to
reach the market for a number of reasons, including the:
·
|
Lack
of adequate quality or sufficient prevention benefit, or unacceptable
safety during pre-clinical studies or clinical
trials;
|
·
|
Failure
to receive necessary regulatory
approvals;
|
·
|
Existence
of proprietary rights of third parties;
and/or
|
·
|
Inability
to develop manufacturing methods that are efficient, cost-effective and
capable of meeting stringent regulatory
standards
|
OUR
INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD NEGATIVELY IMPACT
OUR PROJECTED GROWTH AND ABILITY TO GENERATE REVENUES AND PROFITS, WHICH WOULD
HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF YOUR
INVESTMENT.
We rely
on a combination of patent, patent pending, copyright, trademark and trade
secret laws, proprietary rights agreements and non-disclosure agreements to
protect our intellectual property. We cannot give you any assurance that these
measures will prove to be effective in protecting our intellectual
property.
In the
case of patents, we cannot give you any assurance that our existing patents will
not be invalidated, that any patents that we currently or prospectively apply
for will be granted, or that any of these patents will ultimately provide
significant commercial benefits. Further, competing companies may circumvent any
patents that we may hold by developing products which closely emulate but do not
infringe our patents. While we currently have and intend to seek patent
protection for our products in selected foreign countries, those patents may not
receive the same degree of protection as they would in the United States. We can
give you no assurance that we will be able to successfully defend our patents
and proprietary rights in any action we may file for patent infringement.
Similarly, we cannot give you any assurance that we will not be required to
defend against litigation involving the patents or proprietary rights of others,
or that we will be able to obtain licenses for these rights. Legal and
accounting costs relating to prosecuting or defending patent infringement
litigation may be substantial.
The
WavSTAT System is protected by eight issued patents in the United States, Europe
and Japan, all of which we own, and one additional patent for which we own the
exclusive license. Our LUMA system is the subject of 52 patent applications
worldwide, 34 of which have issued and 18 patents are pending.
We also
rely on proprietary designs, technologies, processes and know-how not eligible
for patent protection. We cannot give you any assurance that our competitors
will not independently develop the same or superior designs, technologies,
processes and know-how.
While we
have and will continue to enter into proprietary rights agreements with our
employees and third parties giving us proprietary rights to certain technology
developed by those employees or parties while engaged by the Company, we can
give you no assurance that courts of competent jurisdiction will enforce those
agreements.
THE
PATENTS WE OWN COMPRISE A LARGE PORTION OF OUR ASSETS, WHICH COULD LIMIT OUR
FINANCIAL VIABILITY.
One of
the eight issued patents for the WavSTAT System has lapsed for failure to pay
maintenance fees, and we are in the process of attempting to re-instate the
patent. We cannot assure you that we will be successful in reinstating the
patent. Our patents comprise approximately 45% of our assets at September 30,
2009. If our existing patents are invalidated or if they fail to provide
significant commercial benefits, it will severely hurt our financial condition,
as a significant percentage of our assets would lose their value. Further, since
our patents are amortized over the course of their term until they expire, our
assets comprised of patents will continually be written down until they lose
value altogether.
Compliance
with publicly-traded company regulations adversely impacts our resources. As a
publicly-traded company, we are subject to rules and regulations that increase
our legal and financial compliance costs, make some activities more
time-consuming and costly, and divert our management's attention away from the
operation of our business. We are obligated to file with the U.S. Securities and
Exchange Commission, or the SEC, annual and quarterly information and other
reports that are specified in the Securities Exchange Act of 1934, or the
Exchange Act, and are also subject to other reporting and corporate governance
requirements, including requirements of the Sarbanes-Oxley Act of 2002, or the
Sarbanes Oxley Act, and the rules and regulations promulgated thereunder, which
impose significant compliance and reporting obligations upon us. We may
not be successful in complying with these obligations, and compliance with these
obligations could be time consuming and expensive. Failure to comply with the
additional reporting and corporate governance requirements could lead to fines
imposed on us, deregistration under the Exchange Act and, in the most egregious
cases, criminal sanctions could be imposed.
9
OUR
PRODUCTS MAY BE SUBJECT TO RECALL OR PRODUCT LIABILITY CLAIMS.
Our
WavSTAT and LUMA System products may be used in connection with medical
procedures in which it is important that those products function with precision
and accuracy. If our products do not function as designed, or are designed
improperly, we may be forced by regulatory agencies to withdraw such products
from the market. In addition, if medical personnel or their patients suffer
injury as a result of any failure of our products to function as designed, or an
inappropriate design, we may be subject to lawsuits seeking significant
compensatory and punitive damages. Any product recall or lawsuit seeking
significant monetary damages may have a material adverse effect on our business
and financial condition.
RISK
FACTORS RELATED TO OUR SECURITIES
WE HAVE
NOT PAID ANY CASH DIVIDENDS AND NO CASH DIVIDENDS WILL BE PAID IN THE
FORESEEABLE FUTURE.
We do not
anticipate paying cash dividends on our Common Stock in the foreseeable future,
and we cannot assure an investor that funds will ever be available to pay a
dividend or that even if the funds are available, that a dividend will be
paid.
THE
APPLICATION OF THE “PENNY STOCK” RULES COULD ADVERSELY AFFECT THE MARKET PRICE
OF OUR COMMON STOCK AND INCREASE YOUR TRANSACTION COSTS TO SELL OUR COMMON
STOCK.
As long
as the trading price of our Common Stock is below $5 per share, the open-market
trading of our Common Stock will be subject to the “penny stock” rules. The
“penny stock” rules impose additional sales practice requirements on
broker-dealers who sell securities to persons other than established customers
and accredited investors (generally those with assets in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 together with their spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of securities and have received the
purchaser’s written consent to the transaction before the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
broker-dealer must deliver, before the transaction, a disclosure schedule
prescribed by the SEC relating to the penny stock market. The broker-dealer also
must disclose the commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements must be sent disclosing recent price information on the
limited market in penny stocks. These additional burdens imposed on
broker-dealers may restrict the ability or decrease the willingness of
broker-dealers to sell our Common Stock, and may result in decreased liquidity
for our Common Stock and increased transaction costs for sales and purchases of
our Common Stock as compared to other securities.
OUR
COMMON STOCK IS THINLY TRADED, SO INVESTORS MAY BE UNABLE TO SELL AT OR NEAR ASK
PRICES OR AT ALL.
Our
Common Stock has historically been sporadically or “thinly-traded”, meaning that
the number of persons interested in purchasing our Common Stock at or near ask
prices at any given time may be relatively small or non-existent. As of January
29, 2010, our average trading volume per day for the past three months was
approximately 80,203 shares a day with a high of 285,700 shares traded and a low
of 2,700 shares traded per day. This situation is attributable to a number of
factors, including the fact that we are a small company which is relatively
unknown to stock analysts, stock brokers, institutional investors and others in
the investment community that generate or influence sales volume, and that even
if we came to the attention of such persons, they tend to be risk-averse and
would be reluctant to follow an unproven company such as ours or purchase or
recommend the purchase of our shares until such time as we became more seasoned
and viable. As a consequence, there may be periods of several days or more when
trading activity in our shares is minimal or non-existent, as compared to a
seasoned issuer which has a large and steady volume of trading activity that
will generally support continuous sales without an adverse effect on share
price. We cannot give you any assurance that a broader or more active public
trading market for our Common Stock will develop or be sustained, or that
current trading levels will be sustained.
THE
MARKET PRICE FOR OUR COMMON STOCK IS PARTICULARLY VOLATILE, GIVEN OUR STATUS AS
A RELATIVELY UNKNOWN COMPANY WITH A SMALL AND THINLY-TRADED PUBLIC FLOAT,
LIMITED OPERATING HISTORY AND LACK OF REVENUES.
The
market for our Common Stock is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the foreseeable future.
In fact, during the ninety-day period ended January 29, 2010, the high and low
closing prices of a share of our Common Stock were $0.47 and $0.31,
respectively. The volatility in our share price is attributable to a number of
factors. First, as noted above, our stock is sporadically and/or thinly-traded.
As a consequence of this lack of liquidity, the trading of relatively small
quantities of shares by our shareholders may disproportionately influence the
price of those shares in either direction. The price for our shares could, for
example, decline precipitously in the event that a large number of our shares
are sold on the market without commensurate demand, as compared to a seasoned
issuer which could better absorb those sales without adverse impact on its share
price. Secondly, we are a speculative or “risky” investment due to our limited
operating history and lack of revenues or profits to date and uncertainty of
future market acceptance for our potential products. As a consequence of this
enhanced risk, more risk-adverse investors may, under the fear of losing all or
most of their investment in the event of negative news or lack of progress, be
more inclined to sell their shares on the market more quickly and at greater
discounts than would be the case with the stock of a seasoned issuer. The
following factors may add to the volatility in the price of our Common Stock:
actual or anticipated variations in our quarterly or annual operating results;
acceptance of our proprietary technology; government regulations, announcements
of significant acquisitions, strategic partnerships or joint ventures; our
capital commitments; and additions or departures of our key personnel. Many of
these factors are beyond our control and may decrease the market price of our
Common Stock, regardless of our operating performance. We cannot make any
predictions or projections as to what the prevailing market price for our Common
Stock will be at any time, including as to whether our Common Stock will sustain
their current market prices, or as to what effect that the sale of shares or the
availability of Common Stock for sale at any time will have on the prevailing
market price.
10
Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include (1) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (2)
manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups by
selling broker-dealers; and (5) the wholesale dumping of the same securities by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market. Although we do not expect to be
in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price. In addition, potential
dilutive effects of future sales of shares of Common Stock by shareholders and
by the Company pursuant to this Prospectus could have an adverse effect on the
market price of our shares.
VOLATILITY
IN OUR COMMON STOCK PRICE MAY SUBJECT US TO SECURITIES LITIGATION.
The
market for our Common Stock is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
In the past, plaintiffs have sometimes initiated securities class action
litigation against a company following periods of volatility in the market price
of its securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and
could divert management’s attention and resources.
OUR
OFFICERS AND DIRECTORS OWN OR CONTROL APPROXIMATELY 16% (INCLUDING ALL OPTIONS
EXERCISABLE WITHIN 60 DAYS OF JANUARY 29, 2010) OF OUR OUTSTANDING COMMON STOCK,
WHICH MAY LIMIT THE ABILITY OF OTHER SHAREHOLDERS, WHETHER ACTING SINGLY OR
TOGETHER, TO PROPOSE OR DIRECT THE MANAGEMENT OR OVERALL DIRECTION OF THE
COMPANY.
As of
January 29, 2010, our officers and directors beneficially own or control
approximately 16% (including all options exercisable within sixty days of
January 29, 2010) of our outstanding Common Stock. These persons will have the
ability to control substantially all matters submitted to our shareholders for
approval and to control our management and affairs, including extraordinary
transactions such as mergers and other changes of corporate control, and going
private transactions which could discourage or prevent a potential takeover of
the Company that might otherwise result in shareholders receiving a premium over
the market price of their common stock.
A LARGE
NUMBER OF SHARES OF COMMON STOCK ARE ISSUABLE UPON EXERCISE OF OUTSTANDING
OPTIONS. THE EXERCISE OF THESE SECURITIES COULD RESULT IN THE SUBSTANTIAL
DILUTION OF THE INVESTMENT OF OTHER SHAREHOLDERS IN TERMS OF PERCENTAGE
OWNERSHIP IN THE COMPANY AS WELL AS THE BOOK VALUE OF THE COMMON
STOCK.
As of
January 29, 2010, there are outstanding Common Stock purchase options entitling
the holders to purchase 7,350,000 shares of Common Stock at a weighted average
exercise price of $0.58 per share (5,050,000 of these shares are
exercisable within 60 days of January 29, 2010). The exercise price for all of
the aforesaid options may be less than your cost to acquire our Common Stock. In
the event of the exercise or conversion of these securities, you could suffer
substantial dilution of your investment in terms of your percentage ownership in
the company as well as the book value of your Common Stock. In addition, the
holders of the common share purchase options may sell Common Stock in tandem
with their exercise of those options to finance that exercise, or may resell the
shares purchased in order to cover any income tax liabilities that may arise
from their exercise of the options, which could substantially depress the
prevailing market price of our stock.
11
OUR
ISSUANCE OF ADDITIONAL COMMON STOCK, OR OPTIONS TO PURCHASE OUR STOCK, WOULD
DILUTE YOUR PROPORTIONATE OWNERSHIP AND VOTING RIGHTS.
We are
entitled under our articles of incorporation to issue up to 225,000,000 shares
of capital stock which includes 160,000,000 shares of Common Stock, 25,000,000
shares of Preferred Stock and 40,000,000 undesignated shares. Our undesignated
shares may be designated as in a senior position to our Common Stock. After
taking into consideration our outstanding Common Stock at January 29, 2010, we
will be entitled to issue up to 26,192,831 additional shares of Common Stock
(160,000,000 authorized less shares outstanding of 70,142,615, 25,000,000 shares
for issuance upon conversion of Preferred Stock, 11,558,974 additional shares
reserved for issuance to Fusion Capital, 10,521,392 shares reserved for issuance
of stock options, 12,500,000 shares reserved for issuance of Common
Stock purchase warrants 3,287,966 shares reserved for placement agent warrants,
547,009 allocable commitment fee shares and 249,213 shares of Common Stock
issued for payment of cumulative preferred dividends) and up to 40,000,000
shares of undesignated capital stock. Our board of directors may generally issue
stock, or options or warrants to purchase those shares, without further approval
by our shareholders based upon such factors as our board of directors may deem
relevant at that time. It is likely that we will be required to issue a large
amount of additional securities to raise capital to further our development. It
is also likely that we will be required to issue a large amount of additional
securities to directors, officers, employees and consultants as compensatory
grants in connection with their services, both in the form of stand-alone grants
or under our stock plans. We cannot give you any assurance that we will not
issue additional shares of Common Stock, or options or warrants to purchase
those shares, under circumstances we may deem appropriate at the time.
THE
LIMITATION OF MONETARY LIABILITY OF OUR DIRECTORS, OFFICERS AND EMPLOYEES UNDER
OUR ARTICLES OF INCORPORATION AND THE INDEMNIFICATION RIGHTS OF OUR DIRECTORS,
OFFICERS, CONSULTANTS AND EMPLOYEES MAY RESULT IN SUBSTANTIAL EXPENDITURES BY
OUR COMPANY AND MAY DISCOURAGE LAWSUITS AGAINST OUR DIRECTORS, OFFICERS,
CONSULTANTS AND EMPLOYEES.
Our
articles of incorporation contain provisions which eliminate the liability of
our directors for monetary damages to the Company and shareholders. Our bylaws
also require us to indemnify our officers and directors. We may also have
contractual indemnification obligations under our agreements with our directors,
officers, consultants and employees. The foregoing indemnification obligations
could result in our company incurring substantial expenditures to cover the cost
of settlement or damage awards against directors, officers, consultants and
employees, which we may be unable to recoup. These provisions and resultant
costs may also discourage the Company from bringing a lawsuit against directors,
officers, consultants and employees for breaches of their fiduciary duties, and
may similarly discourage the filing of derivative litigation by our shareholders
against our directors, officers, consultants and employees even though such
actions, if successful, might otherwise benefit the Company and
shareholders.
ANTI-TAKEOVER
PROVISIONS MAY IMPEDE THE ACQUISITION OF OUR COMPANY.
Certain
provisions of the Minnesota Business Corporation Act and other Minnesota laws
have anti-takeover effects and may inhibit a non-negotiated merger or other
business combination. These provisions are intended to encourage any person
interested in acquiring us to negotiate with, and to obtain the approval of, our
Board of Directors in connection with such a transaction. However, certain of
these provisions may discourage a future acquisition of the Company, including
an acquisition in which the shareholders might otherwise receive a premium for
their shares. As a result, shareholders who might desire to participate in such
a transaction may not have the opportunity to do so.
12
FORWARD-LOOKING
STATEMENTS
This
Prospectus contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E
of the Securities Exchange Act of 1934, as amended. Such forward-looking
statements include statements regarding, among other things, (a) our projected
sales and profitability, (b) our growth strategies, (c) anticipated trends and
market estimates in our industry, (d) our future financing plans, (e) our
anticipated needs for working capital and expectations with respect to capital
expenditures, (f) management’s assumptions regarding costs related to regulatory
compliance, (g) our sales and marketing strategy in certain market segments, (h)
our expectations with respect to legislative trends in the industries in which
we operate, and (i) enhancements to our San Diego facility.
Forward-looking statements, which involve assumptions and describe our future
plans, strategies, and expectations, are generally identifiable by use of the
words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,”
“intend,” or “project” or the negative of these words or other variations on
these words or comparable terminology. This information may involve known
and unknown risks, uncertainties, and other factors that may cause our actual
results, performance, or achievements to be materially different from the future
results, performance, or achievements expressed or implied by any
forward-looking statements. These statements may be found under
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Business,” as well as in this Prospectus generally.
Actual events or results may differ materially from those discussed in
forward-looking statements as a result of various factors, including, without
limitation, the risks outlined under “Risk Factors” and matters described in
this Prospectus and in our quarterly and annual reports filed with the
SEC. In light of these risks and uncertainties, there can be no assurance
that the forward-looking statements contained in this filing will in fact
occur. In addition to the information expressly required to be included in
this filing, we will provide such further material information, if any, as may
be necessary to make the required statements, in light of the circumstances
under which they are made, not misleading.
THE
UNITS OFFERING TRANSACTION
General
Between
May 15, 2009 and December 29, 2009, the Company sold an aggregate of $5,000,000
of units (the “Units”), each consisting of 50 shares of the Company’s $0.01 Par
Value Series B Preferred Stock (“Preferred Stock”) inclusive of an 8% cumulative
dividend and 25 five-year cashless warrants (the “Warrants”) to purchase Common
Stock at $0.30 per share (the “Offering”) to accredited investors (as
defined in Rule 501(a) of Regulation D promulgated under the Securities Act).
The Units were priced at $10.00 per Unit. In connection with the Offering, the
Company placed the Preferred Stock through selling agents (collectively the
“Agents” and individually, an “Agent”) who were paid a cash commission of 10%, a
non-accountable cash fee of 2% and five-year cashless warrants (the “Agent
Warrants”) to purchase 10% of the Common Stock that is issuable upon conversion
of the Preferred Stock at an exercise price equal to $0.35 per
share.
The
cumulative 8% dividend accrues per annum and is payable each December 31 in cash
or, at the election of the Board of Directors of the Company, in Common Stock of
the Company.
Holders
of the Preferred Stock may convert into shares of Common Stock at their option
at any time, in whole or in part, at an initial conversion price equal to $0.20
per share of Common Stock (the “Conversion Price”). The Conversion Price will be
adjusted proportionately for all stock splits, dividends, recapitalizations,
reclassifications, payments made to common stock holders and other similar
events. Holders of the Preferred Stock are obligated to convert their Preferred
Stock into shares of Common Stock at the Conversion Price in the event
(“Mandatory Conversion Date”) of either (i) an underwritten public offering of
Common Stock of not less than $10 million gross proceeds and, in connection
therewith, the Common Stock becoming traded on the NYSE, NYSE AMEX or the NASDAQ
National Market System or (ii) written direction of the Holders of at least 67%
of the Preferred Shares issued and outstanding at the time, or (iii) at such
time as: (x) the shares are freely tradable (either under Rule 144 or an
effective registration statement covering the Conversion Shares), and (y) the
Common Stock of the Company has:
|
·
|
Had
an average closing price for each of the 10 business days prior to the
Mandatory Conversion Date of not less than 100% of the then applicable
Conversion Price; and
|
|
·
|
Had
an average daily trading volume for each of the 10 business days prior to
the Mandatory Conversion Date of not less than 50,000
shares.
|
In the
event of a liquidation of the Company, holders of any then unconverted shares of
the Preferred Stock will be entitled to receive the Liquidation Preference
Amount before holders of Common Stock are entitled to receive any portion of the
consideration available from the liquidation of the Company. For the purposes
hereof, the “Liquidation Preference Amount” is equal to the sum of: (i) the
purchase price of any then unconverted Series B Preferred Stock, and (ii) any
accrued and unpaid dividends thereon.
13
Effect
of the Sale of the Preferred Stock on Our Shareholders
All of
the 25,000,000 shares of Common Stock underlying the Preferred Stock, the
12,500,000 shares of Common Stock underlying the Warrants, the 2,500,000 shares
of Common Stock underlying the Agent Warrants and the 249,213 shares of Common
Stock issued as a cumulative dividend on the Series B Preferred Stock registered
in this offering are expected to be freely tradable. It is anticipated
that shares registered in this offering will be sold from time to time after the
date of this Prospectus. The sale of underlying shares of Common Stock by
the Holders of the Preferred Stock, Warrants and Agent Warrants of a significant
amount of shares registered in this offering at any given time could cause the
market price of our Common Stock to decline and to be highly
volatile.
USE
OF PROCEEDS
This
Prospectus relates to shares of our Common Stock that may be offered and sold
from time to time by the Preferred Stock, Warrant and Agent Warrant holders. We
will receive no proceeds from the sale of shares of Common Stock in this
offering. However, we may receive up to $4,625,000 upon the exercise of the
Warrants and the Agent Warrants. Any proceeds that we receive from the exercise
of warrants will be used for working capital and general corporate
purposes.
DESCRIPTION
OF BUSINESS
Introduction
SpectraScience,
Inc. 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. The “Company”,
hereinafter refers to SpectraScience, Inc. and its wholly-owned subsidiary, Luma
Imaging Corporation. From 1996 until filing for bankruptcy in 2002, the Company
focused on developing the WavSTAT® Optical
Biopsy System. The WavSTAT is a proprietary, minimally invasive technology that
optically analyzes tissue in real-time to distinguish between normal and
pre-cancerous or cancerous tissue, without the need to remove tissue from the
body.
Our
principal executive offices are located at 11568 Sorrento Valley Rd., Suite 11,
San Diego, CA 92121. You can reach us by telephone at (858) 847-0200; by fax at
(858) 847-0880; or by email at info@spectrascience.com. Our website address is
www.spectrascience.com, however the information contained on our website is not
a part of this Prospectus.
Reorganization
The
Company adopted “fresh-start reporting” effective August 2, 2004, given the
absence of any operating activity or other significant activity for almost two
years, in accordance with the guidelines of the A.I.C.P.A.’s Statement of
Position 90-7, “Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code” (“SOP 90-7”).
Business
Development - Acquisitions
On
November 6, 2007, the Company acquired the assets of Luma Imaging Corporation
(“LUMA”) from its stockholders in consideration for 11.2 million restricted
shares of SpectraScience Common Stock.
LUMA had
developed and received approval from the U.S. Food and Drug Administration (the
“FDA”) for an optical, non-invasive diagnostic imaging system that is proven to
more effectively detect cervical cancer precursors than using conventional means
alone (i.e., colposcopy). The LUMA
Cervical Imaging System utilizes a single-use disposable probe and requires
little additional training as it leverages a clinician’s existing skill sets.
When used as an adjunct to colposcopy, LUMA detects significantly more
high-grade cervical cancer precursors than colposcopy alone.
The
transaction was accounted for as a purchase that included intellectual property,
inventory and equipment. The intellectual property consisted of a total of 34
issued U.S. Patents and 28 additional patent applications.
Products
and Markets
SpectraScience
has developed a technology platform to instantly determine if tissue is normal,
pre-cancer or cancerous, without the need for exploratory biopsy. The Company
received FDA approval to market its proprietary and patented optical biopsy
system capable of determining instantaneously whether colon tissue is normal,
pre-cancerous or cancerous without physically removing tissue from the body and
without waiting days for a pathology report. The Company has also developed an
additional application for the detection of pre-cancerous and cancerous tissue
in the esophagus, as well as recently expanded its product offerings to cervical
cancer and pre-cancer detection through the acquisition of Luma Imaging
Corporation.
14
The
WavSTAT operates by using cool, safe ultraviolet laser light to optically
illuminate and analyze tissue, enabling the physician to make an instant
diagnosis during endoscopy when screening for cancer and, if warranted, to begin
immediate treatment during the same procedure. The SpectraScience WavSTAT uses
laser-induced auto-fluorescence to obtain spectral information from tissue at
the suspected site. The system is classified as a non-significant risk device
which transmits low-level UV laser light energy through an optical fiber to the
tissue via the working channel of an endoscope. The tissue in contact with the
optical fiber absorbs the light and the resulting tissue auto-fluorescence is
collected by the same optical fiber and returned to an optical detector within
the WavSTAT console for measurement. The system analyzes the spectral data and
displays the results graphically for the user as normal tissue (green light),
suspected pre-cancer, or cancer (red light). Data are recorded on a printer and
saved in flash memory and a hard drive. The WavSTAT has been tested at five
leading medical centers, including the Mayo Clinic and Massachusetts General
Hospital, with results demonstrating statistically significant improvement in
physician accuracy in the ability to detect pre-cancerous and cancerous tissue
during endoscopy.
The
WavSTAT was specifically designed to serve as a technology platform to
facilitate multiple medical applications for cancer detection. We see additional
opportunities for this core technology in several other large,
as-yet-unexplored, markets which include lung, skin, oral, prostate, breast,
urinary, stomach, IBD and bladder cancer detection. The Company is currently
developing additional applications of its platform for these markets, and is
analyzing feasibility of the use of our technology and the revenue opportunity
for each market.
Colorectal
Cancer
The
American Cancer Society reports colorectal cancer as the third most common
cancer diagnosed in the U.S. with approximately 108,070 new cases annually. With
an estimated 49,960 deaths in 2008, colorectal cancer is second only to lung
cancer as the leading cause of cancer death in the U.S. Candidates for
colorectal cancer screening include all persons, with or without symptoms, over
the age of 50 (or an estimated 80-90 million people in the U.S.) with the
screening market expected to increase 20% over the next ten years. Demographic
trends in Europe are very similar.
Colorectal
cancer is primarily diagnosed through the discovery, removal and
histo-pathologic analysis of polyps. Colon polyps are small masses of tissue
found in the lining of the colon that may be either benign or malignant. The
most commonly performed and generally accepted colorectal cancer screening
procedure to detect polyps is an endoscopy of the lower colon also known as a
flexible sigmoidoscopy or, alternately, a full colonoscopy. According to the
American Society for Gastrointestinal Endoscopy guidelines for colorectal cancer
screening, large polyps (greater than 1 centimeter) are generally removed as a
matter of course and sent to pathology for evaluation. On the other hand, the
guidelines further state that small polyps (less than 1 centimeter which account
for approximately 85% of all polyps) require “individualized treatment on a case
by case basis”. The clinical utility of the WavSTAT occurs when the physician
must decide the best course of treatment for small polyps. When small polyps are
found, it is left to the physician’s discretion based primarily on visual
assessment, whether to remove the polyp, place the patient under surveillance,
or to biopsy. If a biopsy is performed and cancer or pre-cancer is documented by
pathology, the polyp must then be removed during a second costly endoscopy
procedure.
Relative
to colorectal cancer, five-year survival rates as reported by the American
Cancer Society are as follows:
·
|
Approximately
90% of patients live five years or longer if the cancer is detected and
treated at an early stage;
|
·
|
Only
68% of patients live five years or longer if the cancer spreads outside
the polyp and colon to nearby organs or lymph nodes;
and
|
·
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The
five-year survival rate for those patients in whom the cancer has spread
further to the liver or other organs is only
10%.
|
Clearly,
early detection of colorectal cancer is essential to long-term survival.
Unfortunately, the American Cancer Society reports that only 39% of colorectal
cancers are detected at an early stage. Clinical studies indicate that
colorectal cancer screening procedures result in earlier detection and can
prevent as many as 20 to 40% of potential colorectal cancers and subsequently
reduce colorectal cancer deaths by 30 to 50%. Colorectal screening procedures
not only save lives, they also save money. If a patient is not diagnosed until
symptoms develop and the disease has spread, or if misdiagnosed at an early
stage, the chance of patient survival plummets and more advanced treatment
regimens such as surgery, chemotherapy and/or radiation become
necessary.
The
WavSTAT was specifically designed to be used during screening endoscopy of the
colon to aid and improve the physician’s ability to identify small polyps as
normal, pre-cancerous or cancerous tissue in real time. Results from the
Company’s FDA regulated clinical studies performed at the Mayo Clinic
(Rochester, MN), Massachusetts General Hospital (Boston, MA), Hennepin County
Medical Center (Minneapolis, MN) and Minnesota Gastroenterology P.A. (St. Paul
and Minneapolis, MN), demonstrated that using the WavSTAT during colorectal
endoscopic screening increased the physician’s diagnostic accuracy in detecting
pre-cancerous or cancerous polyps by a statistically significant
amount.
15
Based on
the results demonstrated by these clinical studies, we believe that using the
WavSTAT will:
|
·
|
Significantly
improve the physician’s diagnostic accuracy in determining whether small
polyps in the colon are pre-cancerous or
cancerous;
|
|
Improve
patient survival rates by earlier detection and treatment of cancers, and
more importantly pre-cancers, by more accurately identifying cancers or
pre-cancers the physician may
misdiagnose;
|
|
·
|
Improve
the patient’s quality of life by providing an immediate analysis of the
tissue, thereby eliminating the anxiety of waiting several days to hear
the pathology results;
|
|
·
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Enable
the physician to diagnose and treat the patient during the same endoscopy
procedure with the same biopsy instrument, thereby potentially reducing
the need for scheduling a second expensive endoscopy for treatment
purposes;
|
|
·
|
Significantly
reduce the number of physical biopsies performed and reduce the number of
unnecessary follow-on endoscopies performed;
and
|
|
·
|
Reduce
the number of misdiagnosed patients, thereby eliminating the need for more
costly advanced treatments such as surgery, chemotherapy and/or
radiation.
|
Esophageal
Cancer
Barrett’s
esophagus is a condition of the lining of the lower esophagus thought to be
caused primarily by Gastro Esophageal Reflux Disease (“GERD”), more commonly
known as chronic heartburn. Barrett’s esophagus is considered to be a
pre-malignant stage and a precursor to esophageal cancer. Physicians typically
recommend that persons with chronic heartburn should have an endoscopy to look
for Barrett’s esophagus. Some Barrett’s patients will advance further to a stage
where additional abnormal tissue called dysplasia is present. Dysplasia is known
to be the next progressive step toward esophageal cancer and is categorized as
either low-grade or high-grade.
Barrett’s
esophagus, dysplasia and esophageal cancer patients are presently diagnosed via
endoscopy of the esophagus with the physician taking multiple random physical
biopsies of the esophageal lining; this is a significantly invasive procedure.
It is critical that high-grade dysplasia is correctly diagnosed because
physicians frequently recommend surgical resection or removal of the esophagus
in such an event. Unfortunately, dysplasia is difficult to find and/or diagnose
because it is not reliably visible to the physician during standard endoscopy.
The result is that physical biopsies (as many as 20 at once) are performed
either randomly or in a geometric pattern throughout the length of the esophagus
in the hope of finding any existing diseased tissue. Current medical practice
typically follows the guidelines described below:
|
·
|
Patients
with chronic GERD (severe heartburn) receive a screening endoscopy of the
esophagus with multiple biopsies to check for Barrett’s
esophagus;
|
|
·
|
Patients
with Barrett’s esophagus receive an endoscopy with multiple biopsies every
year to check for dysplasia;
|
|
·
|
Patients
with Barrett’s esophagus that has progressed to include low grade
dysplasia receive an endoscopy with multiple biopsies every 6 months to
check for high grade dysplasia; and
|
|
·
|
Patients
with Barrett’s esophagus that has progressed to include high grade
dysplasia receive an endoscopy with multiple biopsies every 3 months to
check for cancer and/or may be referred for esophageal surgical resection,
photodynamic therapy or electrical
ablation.
|
The
American Cancer Society estimates that 16,470 new cases of esophageal cancer
were diagnosed in the year 2008, with a greater than 90% mortality rate. In
addition, the rate of esophageal cancer is growing six times faster than any
other form of cancer. The relatively high death rate associated with esophageal
cancer typically results from a lack of early diagnosis with the outcome being
that the cancer has grown to an advanced stage. As described below, the
frequency of endoscopic surveillance for these patients increases as the
pre-cancerous stages advance in hopes of providing the earliest possible
diagnosis.
The
Company has developed an application for the WavSTAT for the detection of
pre-cancerous and cancerous tissue in the esophagus. We completed a clinical
study in April 2002 using the WavSTAT for the detection of pre-cancerous and
cancerous tissue in the esophagus. The study was 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
WavSTAT for this type of application. A total of 87 patients with Barrett’s
esophagus were enrolled into the trial with 326 optical and physical biopsies
taken. The results of the evaluation show that we were able to obtain a
sensitivity of 95% and a specificity of 80% in determining high-grade versus
low-grade dysplasia or non-dysplastic Barrett’s esophagus, suggesting that the
WavSTAT is effective in detecting pre-cancerous and cancerous tissue. Derived
from the study data, a proprietary tissue recognition software algorithm was
developed and is being used in a current trial. The WavSTAT with the esophageal
algorithm was released for sale in the European Union in late 2008.
16
We
estimate the annual potential revenue estimated for esophageal cancer and
pre-cancer detection in the United States and Europe to be $850 million with the
related annual disposable/re-useable market estimated at an additional $250-650
million.
Cervical
Cancer
Almost a
thousand women die every day worldwide from cervical cancer. Cervical cancer is
the sixth most common form of malignancy for U.S. women, with approximately
11,000 new cases per year. An additional 600,000 women are identified each year
as having potentially pre-cancerous cervical disease. Early detection of these
pre-cancerous conditions allows clinicians to treat patients more effectively,
less expensively, and with fewer lasting health effects. Currently, women with
abnormal PAP tests are diagnosed with a colposcope; A decades-old, low-powered
binocular microscope technology, which provides for a limited visual subjective
assessment of the cervix. A recent large-scale National Cancer
Institute-sponsored clinical trial demonstrated that colposcopy failed to detect
33% of high-grade precancerous lesions in women referred with questionable PAP
results. LUMA’s ability to detect close to 30% more ASCUS/LSIL cervical cancer
precursors than colposcopy alone provides clinicians with a valuable tool in the
fight against cervical cancer.
In the
U.S., more than four million women have abnormal PAP tests each year, and they
typically undergo a series of repeat, stressful and expensive diagnostic tests.
For women with precancerous lesions, the long diagnostic cycle can allow the
disease to progress and develop into invasive, life-threatening cancer. By
providing a more objective test, it is expected that LUMA will allow clinicians
to more effectively manage and treat millions of women who are at risk of
cervical cancer.
The LUMA
provides a non-invasive diagnostic imaging system to detect cervical cancer
precursors more effectively than using conventional means (i.e. colposcopy). The
LUMA utilizes a single-use disposable probe and requires little additional
training as it leverages clinicians’ existing skill sets. When used as an
adjunct to colposcopy, LUMA detects significantly more high-grade cervical
cancer precursors. Clinical trials comprised of over 3,000 women have
demonstrated LUMA’s ability to detect close to 30% more Atypical Squamous Cell
of Undetermined Significance/Low-grade Squamous Intraepithelial Lesion
(ASCUS/LSIL) cancer cell precursors than colposcopy alone. LUMA received FDA
approval as an adjunct to colposcopy in March 2006 and the predecessor company
was conducting a 950 patient post-approval study (300 were completed) to further
examine its advanced detection capabilities when placed in a practical clinical
setting.
In the
U.S. alone, over $6 billion is spent annually on the screening, diagnosis and
treatment of women with cervical cancer. The current colposcopy procedure market
size is approximately $1.0 billion annually. Diagnosing cervical cancer is often
a long and uncertain process, requiring repeat visits by anxious patients.
Approximately two million colposcopy procedures are performed each year in the
United States, with many repeat exams prior to arriving at a definitive
diagnosis. The introduction of HPV-DNA testing is expected to be a catalyst for
this market, increasing the number of colposcopy procedures performed each year.
We believe that the LUMA System is a reliable, easy-to-use diagnostic tool that
provides immediate benefit for clinicians and their patients by reducing the
incidence of misdiagnosis and allowing for early-stage detection and treatment
of cervical cancer precursors.
Government
Regulation
United
States
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 or approval by the FDA. The
FDA regulates the clinical testing, manufacture, labeling, distribution and
promotion of medical devices. If we fail to comply with applicable FDA
requirements we could face:
|
·
|
fines,
injunctions or civil penalties;
|
|
·
|
recall
or seizure of our products;
|
|
·
|
criminal
prosecution;
|
|
·
|
a
recommendation that we not be allowed to contract with the
government;
|
|
·
|
total
or partial suspension of
production;
|
|
·
|
inability
to obtain pre-market clearance/approval for our devices;
and
|
17
|
·
|
withdrawal
of marketing approvals
|
The Food,
Drug, and Cosmetic Act, the Public Health Service Act, and 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 our products.
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 WavSTAT and LUMA are both Class III devices; this is FDA’s most
highly regulated category in the Center for Devices and Radiological Health
(“CDRH”). 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 prior to
commercialization.
FDA
approval to distribute CDRH regulated devices 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. We received
510(k) clearance from the FDA for our 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
usually conduct clinical trials in compliance with testing protocols and patient
“informed consent” forms approved by the Institutional Review Board (IRB or
Safety Committee) at each participating research institution. These boards
oversee and approve all clinical studies at their institutions (in some cases a
central IRB may approve studies at multiple locations). Second, a Pre-Market
Approval (“PMA”) application must be submitted to the FDA describing (i) the
clinical trial results, (ii) the device and its components, (iii) the methods,
facilities and controls used for manufacture of the device, (iv) proposed
labeling and advertising literature, and (v) the demonstration that the product
is safe and effective.
If the
FDA determines, upon receipt of the PMA application, that the application is
sufficiently complete to permit a substantive review, they will accept the
application for filing. Review of a pre-market approval application typically
takes from six months to two years from the date the application is accepted for
filing, but can be significantly longer. Often, during the review period, a
panel primarily composed of clinicians and acting as an advisory committee will
be convened to review, evaluate, and provide non-binding recommendations to the
FDA as to whether the device should be approved. 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 compliant with the
applicable Quality System Regulations requirements.
If FDA
evaluations of both the PMA 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 PMA application. When and if those
conditions are fulfilled to the satisfaction of the FDA, they will issue an
approval letter, authorizing commercial marketing of the device for certain
indications for use. If the FDA’s evaluation of the PMA 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 PMA application. The pre-market
approval process can be expensive, uncertain and lengthy, and a number of
devices for which FDA approval has been sought have never been approved for
marketing.
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. The frequency and depth of
inspections of PMA products are generally more detailed and frequent than
products cleared in the 510(k) process. Quality System Requirements regulations
also require design controls and maintenance of service records. Changes in
existing requirements or adoption or new requirements or policies could
adversely affect our ability to comply with regulatory requirements. Failure to
comply with regulatory requirements could have a material adverse effect on our
business, financial condition or results of operations.
The
Company submitted a PMA application for market clearance of the WavSTAT Optical
Biopsy System for use during endoscopic screening of the colon in September
1998, and was approved by the FDA in November 2000. Based upon beta site outcome
clinical studies, features were added to the WavSTAT, and submitted as a
supplement to the original filing in September 2001. The supplement for the
WavSTAT II was approved by the FDA in November 2001. The Company submitted a
supplement for approval of WavSTAT III in February 2002 and approval was
received in August 2002. We anticipate that product improvements requiring
approval, or any new applications, such as for Barrett’s esophagus developed for
the WavSTAT will be submitted as supplements to the original filing rather than
as original PMA filings. In September 2009, the FDA approved a PMA
amendment for an updated WavSTAT platform which included new state-of-the-art
hardware.
18
A similar
path was followed for the LUMA Cervical Imaging System with the original PMA
being filed by FDA on June 28, 2004. Following interactive communication with
FDA and 15 PMA amendments, the product received its PMA approval on March 16,
2006. In addition to the standard conditions of approval, an additional LUMA
approval condition was a post-approval study. When the LUMA assets were
acquired, approximately one third of the study had been completed. We are now
assessing the data from that study and preparing a plan to continue the
post-approval study to meet this condition of approval.
We are
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. We are not aware of any manufacturing methods for the WavSTAT or
LUMA Systems that will require extensive or costly compliance with environmental
regulations. However, since laws change over time there can be no assurance that
(i) we will not be required to incur significant costs to comply with all
applicable laws and regulations in the future, or (ii) the impact of changes in
those laws or regulations or adoption of new laws and regulations will not have
a material adverse effect upon our ability to do business.
European
Union and Other Countries
The
European Union encompasses most of the major countries in Europe. 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 distribute a
medical device in the European Union, the product must earn and display the CE
mark. Generally, companies must also go through the ISO certification process in
order to obtain the CE mark. SpectraScience received ISO 9001 certification in
July 2000, and CE mark authorization for our products in October 2000. In order
to maintain ISO 9001 certification SpectraScience must undergo a yearly audit to
assure the European Union regulatory agencies of our compliance with ISO 9001
standards. Our last audit was in 2007, when we earned certification for an
additional standard, EN 13485:2003, which is a medical device adaptation of the
ISO 9001 standard. We are periodically re-audited to remain ISO 9001 and EN
13485 certified. There can be no assurance that we will be able to maintain
international certification or CE mark authorization for any of our products or
product components. Furthermore, even though a device bears the CE Mark,
practical complications may arise with respect to market introduction because of
differences among countries in areas such as labeling requirements and
reimbursement practices. We may be required to spend significant amounts of
capital in order to comply with the various regulatory requirements of foreign
countries and achieve reasonable payment for our products.
Product
Research and Development
The
Company invested significant capital in research and development for the fiscal
year ended December 31, 2008, as compared to prior recent history. The increase
was as a result of increased clinical trial activity, the further development of
the Barrett’s software algorithm and the transition to producing systems for
sale, rather than for clinical trials. Research and development expenses were
$2,220,007 and $796,944 for the fiscal years ended December 31, 2008 and 2007,
respectively. For the nine-months ended September 30, 2009, research and
development expenses were $1,180,051.
Compliance
with Environmental Laws
Management
has reviewed the cost of compliance with environmental laws and deemed the cost
of such appliance to be non-material for the fiscal year ended December 31,
2008, the nine-month period ending September 30, 2009 and in the foreseeable
future.
Distribution,
Sales and Customers
Our
objective is to become a leader in the development and commercialization of
advanced proprietary diagnostic products with the capability to differentiate in
real-time between healthy, and pre-cancerous or cancerous tissue. During 2009,
our sales and marketing efforts have been, and will continue to be, focused on
selling the WavSTAT and LUMA Systems in the colorectal, cervical and esophageal
cancer diagnostic markets. We have focused particular emphasis on selling the
WavSTAT system in international markets.
In the
United States, successful product introduction will require a larger direct
sales force or strategic corporate partner that has strongly established call
patterns within Managed Care Organizations. Management believes the
availability of clinical support specialists to support the sales force and to
conduct training seminars to educate endoscopists and other health care
providers regarding the proper use of the WavSTAT and LUMA Systems, will be a
strong component of product introduction strategy. To further international
objectives during 2009, the Company will continue to appoint new European
Distributors. The distributors should have significant resources and strong
franchises which, when coupled with our technology, will increase the likelihood
of commercial success in those markets.
19
Third-Party
Reimbursement
We expect
to market and sell the WavSTAT and LUMA Systems 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 medical devices and/or the
procedure in which the medical device is used. Significant sales of the our
Systems will, in part, be dependent on the availability of adequate
reimbursement from these third party payers for procedures carried out using our
products. We believe that less invasive procedures generally provide less costly
overall therapies compared to conventional drugs, surgery and other treatments.
We anticipate hospital administrators and physicians will justify the use of our
products by the cost and timesaving recognized and clinical benefits that we
believe will be derived from the use of our products.
Third
party payers 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 Center for Medicare and
Medicaid Services (“CMS”). 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,
payers may deny reimbursement. If reimbursement for a particular procedure is
approved, third party payers 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.
Upon
product introduction, currently existing available codes can be used to provide
a level of reimbursement to users. Management believes however, that currently
available reimbursement codes do not adequately reimburse for the anticipated
value that optical biopsy technology brings to the medical care system. Optical
biopsies are not currently approved for reimbursement by third-party payers, and
there can be no assurance that optical biopsy technology 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, Barrett’s esophagus or cervical dysplasia, thereby leading to early
detection and subsequent treatment.
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 payers that reduce reimbursements under capital
cost pass through-systems, could adversely affect the market for our
products.
As stated
previously, demonstrating cost-effectiveness and improved patient outcomes is
critical to the sales cycle since payers evaluate these factors in determining
whether to reimburse for new technologies. Payers may also delay reimbursement
decisions for a year or more, even when provided with cost-effectiveness data,
while they conduct their own technology assessments. The availability of
peer-reviewed literature regarding the technology may help payers in reducing
this technology assessment timeline. To promote the dissemination of literature
regarding the WavSTAT, LUMA and optical biopsy technology, SpectraScience
intends to have published clinical utility data in peer-reviewed
journals.
We expect
that there will be continued pressure on cost-containment throughout the United
States health care system. Cost reduction, cost containment, managed care, and
capitation pricing (putting a ceiling on the price) are very familiar themes
within healthcare. 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, or with established technologies. Lobbying activities are often necessary
to bring to light the value of these new technologies but require extensive
amounts of corporate resources that the Company may not be able to
afford.
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 the SpectraScience products will depend on
the availability and level of reimbursement in international markets we target.
There can be no assurance that we 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 (i)
mandated basic health care benefits, (ii) controls on health care spending
through limitations on the growth of private health insurance premiums and
Medicare and Medicaid spending, (iii) greater reliance on prospective payment
systems, (iv) the creation of large insurance purchasing groups, and (v)
fundamental changes to the health care delivery system. 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 payers, or changes in government and private
third-party payers’ policies toward reimbursement for procedures employing our
products, could have a material adverse effect on our business, financial
condition and results of operations.
20
Manufacturing
and Sources of Supply
SpectraScience
manufactures the WavSTAT and LUMA Systems at its facility in San Diego. The
WavSTAT forceps are outsourced to United States contract OEM manufacturers. At
the present time, SpectraScience performs the manufacturing of the optical fiber
portion of the forceps in-house. The Company also performs certain final
assembly processes of the WavSTAT Forceps. All WavSTAT and LUMA Systems
previously used for pre-clinical testing, FDA compliant clinical trials, and
cost effectiveness/outcome clinical studies were manufactured under a Quality
System with Standard Operating Procedure controls. Management continues to
utilize these quality control Systems and adds to or modifies them as
necessary.
The
WavSTAT and LUMA Systems are, and will be, manufactured in accordance with
current FDA Quality System Regulations (“QSR”) and ISO 9001 International
Standards, both of which are necessary to sell products within the United States
and the European Union. These requirements impose certain procedural and
documentation requirements upon SpectraScience with respect to manufacturing and
quality assurance activities, as well as upon those third parties with whom the
Company contracts to perform certain manufacturing processes.
During
the third quarter of 2007, SpectraScience was granted ISO 9001 and 13485:2003
certification for its manufacturing facility and Quality System. These
international standards are the European equivalent to the FDA’s Quality System
Regulations. Meeting these standards permits use of the “CE mark” to export the
WavSTAT optical biopsy system to the European Union and most other countries of
the world.
The
manufacturing processes and Standard Operating Procedures required to build a
WavSTAT and LUMA System have been reviewed by the FDA and we are authorized to
manufacture the product in our current facility. Both the FDA
and the European Notified Body will continue to perform periodic audits as long
as SpectraScience manufactures and commercializes medical products
Competition
The
medical device industry is highly competitive. Management believes the Company
has few direct competitors in applying spectroscopy for the differentiation of
normal, pre-cancerous or cancerous tissues in the gastrointestinal tract;
however, the development of products using spectroscopic diagnostics for various
medical specialties is rapidly growing. To the best of our knowledge, no other
competitors have completed FDA clinical studies or submitted a pre-market
approval application to the FDA or received CE Mark authority to distribute a
product for the detection of colorectal or esophageal cancer.
·
|
greater
capital resources;
|
·
|
greater
manufacturing resources;
|
·
|
greater
resources and expertise in testing products in clinical
trials;
|
·
|
greater
resources and expertise in the areas of research and
development;
|
·
|
greater
expertise in obtaining regulatory approvals;
and
|
·
|
greater
resources for marketing and sales
activities.
|
Patents
SpectraScience
currently owns exclusive rights to a total of eight issued U.S. patents and
international patents for the WavSTAT technology.
Patent Name
|
U.S. Patent
Number
|
|||
Optical
Biopsy Forceps
|
5,762,613
|
|||
System
for Diagnosing Tissue with Guidewire
|
5,601,087
|
|||
Method
of Diagnosing Tissue with Guidewire
|
5,439,000
|
|||
Guidewire
Catheter and Apparatus for Diagnostic Imaging
|
5,383,467
|
|||
Optical
Biopsy Forceps System and Method of Diagnosing Tissue
|
6,066,102
|
|||
Optical
Biopsy Forceps
|
6,129,683
|
|||
Optical
Biopsy System and Methods for tissue Diagnosis
|
6,174,291
|
|||
Optical
Forceps System and Method of Diagnosing and Treating
Tissue
|
6,394,964
|
21
SpectraScience
is also 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 above patents expire
between January 2015 and May 2022. Each of the international patents designates
several countries for patent protection.
SpectraScience
currently owns exclusive rights to a total of thirty-four issued U.S. patents
and international patents for the LUMA technology.
U.S. Patent
Number
|
||||
Spectral
Volume Microprobe Analysis of Materials
|
5,713,364
|
|||
Spectral
Volume Microprobe Arrays
|
6,104,945
|
|||
Sheath
for Cervical Optical Probe
|
D453,832
|
|||
Sheath
for Cervical Optical Probe
|
D453,962
|
|||
Sheath
for Cervical Optical Probe
|
D453,963
|
|||
Sheath
for Cervical Optical Probe
|
D456,964
|
|||
Spectroscopic
System Employing a Plurality of Data Types
|
6,385,484
|
|||
Spectral
Volume Microprobe Arrays
|
6,411,835
|
|||
Systems
and Methods for Optical Examination of Samples
|
6,411,838
|
|||
Spectral
Data Classification of Samples
|
6,421,553
|
|||
Optical
Methods and Systems for Rapid Screening of the Cervix
|
6,427,082
|
|||
Sheath
for Cervical Optical Probe
|
D460,821
|
|||
Substantially
Monostatic, Substantially Confocal Optical Systems for Examination of
Samples
|
6,760,613
|
|||
Fluorescent
Fiberoptic Probe for Tissue Health Discrimination and Method of Use
Thereof
|
6,768,918
|
|||
Method
and Apparatus for Identifying Spectral Artifacts
|
6,818,903
|
|||
Spectral
Volume for Microprobe Arrays
|
6,826,422
|
|||
Sheath
for Cervical Optical Probe
|
D507,349
|
|||
System
for Normalizing Spectra
|
6,839,661
|
|||
Optical
Probe Accessory Device for Use In-Vivo Diagnostic
Procedures
|
6,847,490
|
|||
Methods
of Monitoring Effects of Chemical Agents on a Sample
|
6,902,935
|
|||
Sheath
for Cervical Optical Probe
|
D500,134
|
|||
Optimal
Windows for Obtaining Optical Data for Characterization of Tissue
Samples
|
6,933,154
|
|||
Methods
and Apparatus for Displaying Diagnostic Data
|
7,136,518
|
|||
Spectral
Volume Microprobe Analysis of Materials
|
5,813,987
|
|||
Colonic
Polyp Discrimination by Tissue Florescence and Fiberoptic
Probe
|
7,103,401
|
|||
Optical
Methods and Systems for Rapid Screening of the Cervix
|
7,127,282
|
|||
Methods
and Systems for Correcting Image Misalignment
|
7,187,810
|
|||
Image
Processing using Measures of Similarity
|
7,260,248
|
|||
Methods
and Apparatus for Processing Spectral Data for use in Tissue
Characterization
|
7,282,723
|
|||
Methods
and apparatus for characterization of tissue samples
|
7,309,867
|
|||
Fluorescent
fiberoptic probe for tissue health discrimination
|
7,310,547
|
|||
Methods
and Systems for Correcting Image Misalignment
|
7,406,215
|
|||
Unique
Methods of Calibrating Spectral Data
|
7,459,696
|
|||
Unique
Methods and Apparatus for Evaluation of Image Focus
|
7,469,160
|
An
additional 18 patent applications are pending. In total, more than 500 valid
claims have been granted covering a broad range of technology and methods.
Foreign rights have further been secured for many of the most important
patents.
SpectraScience
believes that it holds the single largest patent portfolio of its kind in the
field of optical methods for identifying tissue abnormalities, particularly for
identifying cancer and its precursors. The Company also believes that its
portfolio will protect the core technology and methods embodied in the LUMA and
WavSTAT Systems and for many of its foreseeable product extensions and will
create a substantial barrier to entry for others pursuing similar
approaches.
Core
Areas of Patent Protection
More
specifically, SpectraScience’s portfolio provides protection in the following
key technology, design and methods areas:
|
s
|
Localized
tissue characterization using optical
methods;
|
|
s
|
Specific
application of fluorescence and broadband spectroscopy, and video imaging,
particularly in combination;
|
22
|
s
|
Designs
and use of a disposable sheath, particularly in combination with systems
and methods, including use of unique
identifiers;
|
|
s
|
Algorithmic
methods specific to optical assessment of tissue characteristics,
particularly involving identification, classification and calibration
methods;
|
|
s
|
Clinical
applications of these methods and systems for identifying tissue
characteristics, including use of display methods, marking methods
(including biomarkers), and in combination with treatment;
and
|
|
s
|
Applications
to further system development, including applications for screening,
treatment and other fields beyond cervical
cancer
|
SpectraScience
holds registered trademarks for the WavSTAT and LUMA Cervical Imaging System and
SpectraScience documents, software and graphics are protected by appropriate
copyrights.
SpectraScience’s
ability to obtain and maintain patent protection for its products, preserve its
trade secrets and operate without infringing on the proprietary rights of others
will directly affect the success the Company's operations. The Company's
strategy regarding the protection of its proprietary intellectual property and
innovations is to seek patents on those portions of our technology that
management believes are patentable, to obtain copyrights for its software if
appropriate, and to protect as trade secrets other confidential information and
proprietary know-how. There are certain technological aspects of the WavSTAT and
LUMA Systems that are not covered by any patents or patent applications.
SpectraScience seeks to protect its trade secrets and proprietary know-how by
obtaining confidentiality and invention assignment agreements in connection with
employment, consulting and advisory relationships.
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. 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.
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, management 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.
Product
Liability
The risk
of product liability claims, product recalls and associated adverse publicity is
inherent in the testing, manufacturing, marketing and sale of medical products.
We have clinical trial liability insurance coverage at this time for our
clinical programs. There can be no assurance that future insurance coverage will
be adequate or available. We may not be able to secure product liability
insurance coverage on acceptable terms or at reasonable costs when needed. Any
liability damages could exceed the amount of our coverage. A successful product
liability claim against us could require us to pay a substantial monetary award.
Moreover, a product recall could generate substantial negative publicity about
our products and business and inhibit or prevent commercialization of other
future products.
Employees
As of
January 29, 2010, SpectraScience had nine full-time employees, six involved with
manufacturing, one in sales and marketing and two engaged in finance and
administration. The Company’s payroll is administered through an independent
third party. SpectraScience is not subject to any collective bargaining
agreement and management believes that employee relations are generally
satisfactory.
SpectraScience
relies on external consultants in the financial, regulatory, software
development and design engineering areas. When management determines to increase
our workforce in response to improved economic, market, and/or business
conditions, there is no assurance that we will be able to attract or retain
employees with the skills we require.
23
Other
Our
operations currently are, or may be in the future, subject to various federal,
state and local laws, regulations and recommendations relating to data
protection, safe working conditions, manufacturing practices and the purchase,
storage, movement, use and disposal of hazardous or potentially hazardous
substances used in connection with our research work and manufacturing
operations, including radioactive compounds and infectious disease agents.
Although we believe that our safety procedures comply with the standards
prescribed by federal, state and local regulations, the risk of contamination,
injury or other accidental harm cannot be eliminated completely. In the event of
an accident, we could be held liable for any damages that result and any
liabilities could exceed our resources. Failure to comply with such laws could
subject an entity covered by these laws to fines, criminal penalties and/or
other enforcement actions.
DESCRIPTION
OF PROPERTIES
SpectraScience
leases its principal facility from an unrelated third party. The facility is
located at 11568-11 Sorrento Valley Road, San Diego, California 92121, and is
well-maintained and approved by the FDA for manufacturing. The facility consists
of approximately 5,080 square feet of office, research and development,
manufacturing, quality testing, and warehouse space. The lease provides for
monthly rental payments of $4,318 through December 2011, plus a pro rata share
of operating expense and real estate taxes (approximately $972 per month). In
the event of the termination of this lease, we believe that we could lease other
acceptable space on a comparable basis.
24
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and analysis provides information that management believes
is relevant to assess and understand our results of operations and financial
condition. This discussion should be read in conjunction with the consolidated
financial statements and footnotes that follow such consolidated financial
statements.
Overview
In the
third fiscal quarter of 2008, the Company began selling its products and is no
longer a development stage company. The Company currently has FDA approval to
market the WavSTAT System for detecting pre-cancerous and cancerous tissue in
the colon and to market the LUMA System for use as an adjunct to colposcopy in
the detection of early stage cancer and pre-cancer of the cervix. The Company
also has CE approval to sell the WavSTAT System for detecting pre-cancerous and
cancerous tissue in the colon and esophagus. Our tactical plan is to continue
refining our WavSTAT software algorithm for use in detecting pre-cancer and
cancer in the esophagus as well as to expand to other digestive tract
applications (IBD, small intestine).
Over the
next twelve months, SpectraScience intends to:
|
·
|
Continue
selling the WavSTAT System in the U.S. and international markets for the
detection and treatment of colon cancer and
pre-cancer;
|
|
·
|
Complete
WavSTAT System clinical trials related to the diagnosis of esophageal
cancers;
|
|
·
|
Begin
marketing and selling the WavSTAT System in U.S. and international markets
for the detection of esophageal cancer and
pre-cancer;
|
|
·
|
Position
and begin selling or renting the LUMA System in the U.S. as an adjunct to
colposcopy to specialized OB/GYN clinics (increase revenue), managed care
organizations (early detection and future cost avoidance), teaching
hospitals and medical environments where nurse practitioners and/or
medical clinicians can leverage our technology for effective early
diagnosis; and
|
|
·
|
Enhance
our San Diego facility and grow our organization to allow for the
manufacture of both WavSTAT and LUMA Systems in-house and also to begin
the design and planning for the next generation of fluorescence-based
systems.
|
Cash
Requirements
SpectraScience
expects to incur significant additional operating losses through 2010, as we
complete clinical trials, begin outcome-based clinical studies, continue
research and development activities, and ramp up sales and marketing efforts to
sell both the WavSTAT and LUMA Systems. We may incur unexpected expenses, or we
may not be able to meet our revenue forecast, and such events will require us to
seek additional capital.
SpectraScience
has financed its capital requirements principally through the private sale of
equity securities. The Company had cash and cash equivalents of approximately
$1,618,000 at December 31, 2008 and $5,188,000 at December 31, 2007. The
decrease in cash for the fiscal year was a result of approximately $4,018,000
cash used in operations and acquisitions of equipment offset by sales of common
stock for net proceeds of approximately $448,000. The Company had cash of
approximately $1,315,000 at September 30, 2009. The decrease in net cash for the
nine-month period was a result of approximately $1,782,000 cash used in
operations and purchases of fixed assets of approximately $15,000 offset by
sales of Preferred Stock for net proceeds of approximately $1,434,000 and
exercises of stock options for net proceeds of approximately
$60,000.
From
September 30, 2009 until the date of this Prospectus, the Company sold
16,660,000 shares of Series B Convertible Preferred Stock including common stock
purchase warrants to purchase 8,330,000 shares at $0.30 per share and common
stock purchase warrants to purchase 1,666,000 shares at $0.35 per share. The
Company received gross proceeds of $3,332,000 from the sale and net proceeds of
$2,876,360 after payment of $455,640 in fees. SpectraScience expects that we
have sufficient working capital for planned operations for at least the next
twelve months of operations.
SpectraScience’s
future liquidity and capital requirements will depend upon a number of factors,
including but not limited to:
|
·
|
The
timing and progress of outcome-based clinical
trials;
|
25
|
·
|
The
timing and extent to which SpectraScience’s products gain market
acceptance;
|
|
·
|
The
timing and expense of developing marketing and distribution
channels;
|
|
·
|
The
progress and expense of developing next generation products and new
applications for the WavSTAT and LUMA
Systems;
|
|
·
|
The
potential requirements and related costs for product
modifications;
|
|
·
|
The
timing and expense of various U.S. and foreign regulatory
filings;
|
|
·
|
The
maintenance of various U.S. and foreign government approvals, or the
timing of receipt of additional
approvals;
|
|
·
|
The
status, maintenance and enhancement of SpectraScience’s patent portfolio;
and
|
|
|
·
|
The
overall effect of the present global economic recession on the ability of
the Company to generate sales
revenue.
|
The
Fusion Transaction
On
January 30, 2009, we signed a $6.0 million common stock purchase agreement with
Fusion Capital Fund II, LLC, an Illinois limited liability company (“Fusion
Capital”). Concurrently with entering into the common stock purchase
agreement, we entered into a registration rights agreement with Fusion
Capital. Under the registration rights agreement, we agreed to file
and we filed a registration statement which became effective on May 5, 2009,
related to the transaction with the SEC covering the shares that have been
issued or may be issued to Fusion Capital under the common stock purchase
agreement. After the SEC has declared effective the registration
statement related to the transaction, we have the right over a 24-month period
to sell our shares of common stock to Fusion Capital from time to time in
amounts between $25,000 and $1 million, depending on certain conditions as set
forth in the agreement, up to an aggregate of $6.0 million. The
Company will control the timing and amount of any sales of shares to Fusion
Capital and, as of the date of this Prospectus the Company had sold no shares to
Fusion Capital under this agreement.
The
purchase price of the shares related to the $6.0 million of future funding will
be based on the prevailing market prices of the Company’s shares at the time of
sales without any fixed discount. Fusion Capital will not have the
right or the obligation to purchase any shares of our common stock on any
business day that the price of our common stock is below $0.15. The
common stock purchase agreement may be terminated by us at any time at our
discretion without any cost to us. There are no negative covenants,
restrictions on future fundings, penalties or liquidated damages in the
agreement. The proceeds to be received by the Company under the
common stock purchase agreement will be used for working capital and general
corporate purposes.
In
consideration for entering into the agreement, upon execution of the common
stock purchase agreement we have issued to Fusion Capital 1,094,017 shares of
our common stock as a commitment fee. Also, we will issue to Fusion Capital an
additional 547,009 shares as a commitment fee pro rata as we receive the $6.0
million of future funding.
Results
of Operations
The
following discussion should be read in conjunction with the consolidated
Financial Statements and Notes thereto appearing elsewhere in this
report.
For
the Nine Months ended September 30, 2009 and 2008
The
Company recognized approximate revenue of $122,000 and $61,000 for the nine
months ended September 30, 2009 and 2008, respectively. The increase is a result
of the Company beginning to ramp up its sales primarily as a result of the
completion of the WavSTAT System platform for sale and the introduction of the
product in Europe, as compared to the comparable period one year
ago.
Overall
research and development expenses for the nine months ended September 30, 2009
and 2008 were approximately $1,180,000 and $1,619,000, respectively. The
approximate $439,000 decrease was comprised of decreases of approximately
$322,000 in payroll expense, $166,000 in stock compensation expense, $118,000 in
engineering development expense, $37,000 in consulting expense, $22,000 in
production supplies expense and $27,000 in all other expense offset by increases
of approximately $253,000 in obsolete inventory expense. The reduction in
overall expenses is a result of an effort to minimize expenses due to the global
economic recession. The increase in inventory obsolescence expense is primarily
the result of a shift to manufacturing diagnostic systems that utilize more
current technologies.
General
and administrative expenses for the nine months ended September 30, 2009 and
2008 were approximately $1,555,000 and $1,696,000, respectively. The $141,000
reduction was comprised of decreases of approximately $130,000 in payroll
expense, $60,000 in travel expense, $123,000 in professional expense and $19,000
in other expense offset by approximate increases of $91,000 in financing fee
amortization, $68,000 in stock compensation expense and $32,000 in bad debt
expense. The overall decrease was a result of headcount and discretionary
expense reductions due to the Company’s response to the downturn in the global
economy. Certain expense increases were generally a result of increased
consultant utilization after an earlier reduction in headcount and increases in
non-cash amortization.
26
Sales and
marketing expenses for the nine months ending September 30, 2009 and 2008 were
approximately $288,000 and $593,000, respectively. The $304,000 reduction was
comprised of approximate decreases of $132,000 in payroll expense, $72,000 in
stock compensation expense, $77,000 in advertising and trade shows and $3,000 in
other expense offset by an $18,000 increase in travel expense. The reduction in
stock compensation expense is primarily the result of employee headcount
reductions and the associated re-capture of previously recognized stock
compensation expense. The overall decrease was a result of a reduction in sales
headcount and related sales expenses in response to the overall economic
downturn.
Other
income, net, for the nine months ended September 30, 2009 and 2008 decreased
approximately $113,000. The reduction was primarily due to a decrease in
interest income due to lower comparative interest bearing cash balances held
during the nine months ended September 30, 2009 as compared to the same quarter
one year ago.
As a
result of the above, the approximate net loss for the nine months ended
September 30, 2009 and 2008 was ($2,983,000) and ($3,763,000), respectively. The
decreased net loss was due to decreases in overall operating expense as a result
of planned expense reductions taken as a result of the overall recessionary
market environment. Of the net loss for the nine months ended September 30, 2009
approximately $604,000 was comprised of non-cash stock-option
expense.
Liquidity
and Capital Resources
On
September 30, 2009, the Company had a cash balance of $1,315,252 as compared
with a cash balance of $1,618,181 at December 31, 2008, representing a decrease
of $302,929 in cash for the period. The cash balances decreased primarily due to
working capital used in operations offset by sales of Preferred Stock as
described above. There have been minimal capital equipment expenditures and none
are foreseen.
From May
through September 30, 2009, as a part of a Units offering, the Company sold
8,340,000 shares of Preferred Stock to accredited investors for an aggregate
consideration of $1,668,000. The Company received net cash proceeds of
$1,434,640 after the payment of finders’ fees and expenses of $233,360. From
September 30, 2009 until November 16, 2009 the Company sold an additional
13,310,000 shares of Preferred Stock, including warrants to purchase 6,655,000
shares of Common Stock at $0.30 per share and 1,331,000 Agent Warrants to
purchase Common Stock at $0.35 per share. The Company received $2,662,000 gross
proceeds from the sale, and net proceeds of $2,359,000 after payment of $303,000
in fees.
On
January 30, 2009, the Company entered into a common stock purchase agreement
with Fusion Capital. Under the purchase agreement, Fusion Capital is obligated,
under certain conditions, to purchase shares from us in an aggregate amount of
$6.0 million from time to time over a twenty-four (24) month period. At
September 30, 2009, the Company had not sold any shares to Fusion
Capital.
SpectraScience
expects to incur significant additional operating losses through at least 2010,
as we complete clinical trials, begin outcome-based clinical studies and
increase sales and marketing efforts to commercialize the WavSTAT systems. If we
do not receive sufficient funding, the Company may be unable to continue as a
going concern. We may incur unknown expenses or we may not be able to meet our
revenue forecast, and one or more of these circumstances would require us to
seek additional capital. We may not be able to obtain equity capital or debt
funding on terms that are acceptable. Even if the Company receives additional
funding, such proceeds may not be sufficient to allow the Company to sustain
operations until it attains profitability and positive cash flows from
operations.
Fiscal
Year Ended December 31, 2008 As Compared To Fiscal Year Ended December 31,
2007
Operating
Expenses
Consolidated
operating expenses were $5,304,762 (of which approximately $992,000 was for
non-cash compensation from stock options) for the fiscal year ended December 31,
2008, versus $3,020,588 (of which approximately $1,401,000 was for non-cash
compensation from stock options) for the comparable period one year ago. The net
increase of $2,284,174 was comprised of a $1,423,063 increase in research and
development expenses, a $646,758 increase in general and administrative expenses
and a $214,353 increase in sales and marketing expenses.
Research
and development expenses increased by $1,423,063 due to an increase of $876,026
in payroll expense, a $268,406 increase in stock option compensation expense, a
$181,509 increase in product development expense, a $54,570 increase in clinical
trial expense, a $46,855 increase in production supplies expense and a net
$4,304 decrease in all other research and development expenses. All of the
increases were a result of the additional activity and effort invested in the
development and commercialization of the WavSTAT and LUMA Systems for the fiscal
year ended December 31, 2008.
27
General
and administrative expenses increased $646,758 due to a $306,626 increase in
administrative payroll expense, a $223,858 increase in depreciation and
amortization, a $149,637 increase in patent legal expense, a $79,494 increase in
audit related expense, a $67,245 increase in recruiting fees, a $61,117 increase
in rent and occupancy expenses, a $54,820 increase in travel expense, a $16,778
increase in investor relations expense a $45,110 increase in consulting expense
and a $132,779 increase in all other expenses all offset by a $490,706 decrease
in stock compensation expense. The overall increase in most
categories of general and administrative expense reflects the increased
activity, larger organization and shift from development to commercialization of
our systems in fiscal 2008 as compared to 2007. The increase in depreciation and
amortization expense is primarily a result of the acquisition of the LUMA patent
portfolio in November 2007, and its subsequent amortization for the full 2008
fiscal year. The decrease in stock compensation expense results primarily from a
higher number of stock options granted in the prior fiscal year.
Sales and
marketing expenses increased by $214,353. The increase was comprised of $289,216
in sales payroll expense, a $62,422 increase in trade show expense, a $21,866
increase in advertising expense, a $10,106 increase in travel expense and a
$19,916 increase in all other sales expenses offset by an $189,173 decrease in
stock compensation expense. The decrease in stock compensation expense results
from a general increase in the vesting terms of recent stock option grants and
the relatively low market price of Company stock as compared to the prior fiscal
year.
Other
Income
Other
income, net increased $80,427 due to interest earnings on higher average cash
balances for the year as compared to the prior fiscal year.
Liquidity
and Capital Resources
On
December 31, 2008, the Company had cash and cash equivalent balances of
$1,618,181 as compared to $5,188,177 in cash and cash equivalents at December
31, 2007, representing a decrease of ($3,569,996) in liquid assets for the year.
The cash and liquid asset balances decreased primarily due to working capital
used in operations offset by funds raised through Regulation D private
placements of Common Stock. During the fiscal year ended December 31, 2008, the
Company raised $445,352, net of issuance costs, from the sale of 736,856 shares
of Common Stock at $0.70 per share, in each case sold to accredited investors.
There have been minimal capital equipment expenditures incurred and no
significant capital expenditures are foreseen.
Off
Balance Sheet Arrangements
The
Company has no off balance sheet arrangements.
Critical
Accounting Policies and Estimates
This
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate these estimates, including
those related to intangibles, income taxes, financing operations, contingencies
and litigation. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
We have
identified the policies below as critical to our business operations and the
understanding of our results of operations. The impact and any associated risks
related to these policies on our business operations is discussed throughout
this Management's Discussion and Analysis of Financial Condition and Results of
Operations where such policies affect our reported and expected financial
results.
Accounting
For Transactions Involving Stock Compensation
In
December 2005, accounting standards related to, "Share-Based Payment", were
adopted. The new standards require us to expense employee stock options and
other share-based payments. The Company has been recording to expense the fair
value of employee and non-employee options. These expenses amounted to $992,223
and $1,401,096 for the years ended December 31, 2008 and 2007,
respectively.
Accounting
standards require that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that their carrying amounts may not
be recoverable. If the cost basis of a long-lived asset is greater than the
projected future undiscounted net cash flows from such asset (excluding
interest), an impairment loss is recognized. Impairment losses are calculated as
the difference between the cost basis of an asset and its estimated fair value.
These standards also require companies to separately report discontinued
operations and extend that reporting requirement to a component of an entity
that either has been disposed of (by sale, abandonment or in a distribution to
owners) or is classified as held for sale. Assets to be disposed of are reported
at the lower of the carrying amount or the estimated fair value less costs to
sell.
28
Accounting
for Income Taxes
In July
2006, new accounting standards required a new evaluation process for all tax
positions taken. If the probability for sustaining tax positions is greater than
50%, then the tax position is warranted and recognition should be at the highest
amount which would be expected to be realized upon ultimate settlement. These
standards require expanded disclosure at each annual reporting period unless a
significant change occurs in an interim period. Differences between the amounts
recognized in the statements of financial position prior to the adoption of
these standards and the amounts reported after adoption are to be accounted for
as an adjustment to the beginning balance of retained earnings. The Company has
determined that it does not have uncertain tax positions on its 2004 through
2008 tax returns. The Company had a full valuation allowance on its deferred tax
assets as of December 31, 2007 and 2008, and has not recognized any tax benefits
since inception.
Recent
Accounting Pronouncements
In April
2009, accounting standards related to “Interim Disclosures about Fair Value of
Financial Instruments” require disclosures about fair value of financial
instruments in interim and annual financial statements. These standards are
effective for periods ending after June 15, 2009. The Company adopted these
standards effective for the quarter ending September 30, 2009. The adoption did
not have an impact on the Company’s financial position or results of
operations.
In May
2009, more specific accounting standards related to “Subsequent Events”
established general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued.
The Company adopted these standards for the quarter ending September 30,
2009.
In June
2009, a new accounting standard related to the codification of all accounting
standards was issued. Under the standard, Accounting Standards Codification
(Codification) will become the source of authoritative U.S. generally accepted
accounting principles (GAAP) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (SEC) under the authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. On the effective date of
this Statement, the Codification will supersede all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become
non-authoritative. This statement is effective for financial statements issued
for interim and annual periods ending after September 15, 2009. In the Financial
Accounting Standards Board’s (“FASB”) view, the issuance of this Statement and
the Codification will not change GAAP, except for certain nonpublic
nongovernmental entities. The Company does not expect that the adoption of this
Statement will have a material impact on the Company’s financial
statements.
Other
accounting standards that may have been issued or proposed by the FASB or other
standards-setting bodies are not expected to have a material impact on the
Company’s consolidated financial statements.
MANAGEMENT
The
following information is provided with respect to the directors and officers of
the Company:
Name
|
Age
|
Director/Officer Since
|
||
Jim
Hitchin, Chairman,
President and CEO
|
67
|
2004
|
||
Jim
Dorst, Chief Financial
Officer
|
55
|
2007
|
||
Mark
McWilliams, Director
|
53
|
2004
|
||
Stanley
Pappelbaum, M.D., Director
|
71
|
2006
|
||
Chester
E. Sievert, Director
|
58
|
2004
|
||
F.
Duwaine Thompson, Director
|
76
|
2009
|
29
Jim Hitchin,
Chairman, President and CEO joined SpectraScience in January 2004 as part
of the bankruptcy acquisition team. For the previous 15 years, he was the
founder, CEO and Chairman of Infrasonics, Inc., a medical device company in the
respiratory care field. Infrasonics was venture funded and completed a
successful initial public offering. Mr. Hitchin served as Chairman, President
and CEO of Infrasonics during its 15 years as a public company. Infrasonics was
the first in its market to have ISO 9001 and the CE Mark for fourteen 510(k) and
two PMA products. Infrasonics revenue growth was at a compound rate of 62%
during its fifteen-year life before being sold to a competitor for 2.5 times
revenue. In previous companies, he was COO of a public energy company and the
VP, General Manager of a public oceanographic engineering firm. Mr. Hitchin has
extensive experience in all phases of manufacturing and company operations, in
particular, sales and marketing of medical devices. He graduated from San Diego
State University with a degree in Physics.
Jim Dorst, Vice President of Finance
and CFO joined the Company in December 2007. Mr. Dorst brings to the
Company over 20 years of senior management experience in finance, operations,
planning and business transactions. Prior to joining SpectraScience, Mr. Dorst
was Chief Financial Officer of Aethlon Medical, Inc., a public medical device
development company. Before joining Aethlon, Mr. Dorst was Vice President of
Finance and Operations for Verdisoft Corporation, a developmental-stage
mobile-software developer acquired by Yahoo, Inc. Previously, he held executive
positions as SVP of Finance and Administration at SeeCommerce, COO/CFO of Omnis
Technology Corp and CFO / SVP of Information Technology at Savoir Technology
Group, Inc. (acquired by Avnet, Inc.). Mr. Dorst practiced as a Certified Public
Accountant with Coopers & Lybrand (PricewaterhouseCoopers) and holds an MS
in Accounting and a BS in Finance from the University of Oregon.
Mark McWilliams,
Director. Since June 2007 Mr. McWilliams has served as the CEO of
Medipacs, Inc a development stage infusion pump company. Prior to that, from
December 2003 to November 2005 he was Director of Cell Imaging and Analysis at
Beckman Coulter after the recent sale of Q3DM to Beckman in December 2003. He
was President and Chief Executive Officer and Director of Q3DM, from October
2001 to December 2003, a life-sciences startup that raised several angel and
venture capital funding rounds that was acquired by Beckman Coulter. Previously,
he was founder and COO of Medication Delivery Devices (“MDD”), an alternate care
infusion systems company that was acquired by Baxter Healthcare in 1996. Mr.
McWilliams served as a VP of Research and Development at Baxter Healthcare for
three years following the sale of MDD. Prior to MDD, he served as Product
Development Manager at the founding of Block Medical where he was responsible
for bringing the company’s first two FDA approved products rapidly to market.
Block was sold to Hillenbrand Industries in 1991. He previously worked for
Hughes Aircraft, Vacuum General and Martin Marietta. He earned his MSME from the
Massachusetts Institute of Technology, his BSME from Northeastern University and
holds eight utility patents.
Stanley J.
Pappelbaum M.D., Director. Dr. Pappelbaum has been Managing Partner of
Pappelbaum, Turner & Associates, a national healthcare consultancy company
that advises hospital, medical group, health insurance, and governmental
healthcare clients since 2000. Dr. Pappelbaum joined Scripps hospital in 1996 as
Chief Transformational Officer in charge of creating and implementing Scripps’
strategic vision of the future. In 1997, he was promoted to Executive Vice
President and Chief Operating Officer and, in 1999, he was promoted to President
and Chief Executive Officer when the hospital reached annual revenues of over $1
billion. From 1985 to 1995, he was the managing partner of Professional Health
Consulting Group, a national company of physician executives who analyzed and
managed change for complex not-for-profit healthcare systems clients throughout
the United States. From 1969 to 1984, Dr. Pappelbaum taught and practiced
Pediatric Cardiology at the University of California, San Diego and at San Diego
Children’s Hospital, where he was Chief of Pediatric Cardiology from 1972
to1978. Dr. Pappelbaum completed his undergraduate work at McGill University in
Montreal and received his medical degree from the University of British Columbia
Faculty of Medicine in Vancouver. He completed his residency in pediatric
medicine at Montreal Children’s Hospital of McGill University and did graduate
studies in cardiovascular physiology and a fellowship in pediatric cardiology at
the University of California, Los Angeles. He also was awarded an Alfred P.
Sloan Fellowship at the Massachusetts Institute of Technology where he earned a
Master's degree in management (health option).
Chester E.
Sievert, Jr., Director. Mr. Sievert has been President of Advanced
Photodynamic Technologies since January 2003. He previously worked at
SpectraScience as a consultant in June 1996, and subsequently held various
executive positions. Mr. Sievert served as Chairman of the Board of
SpectraScience beginning in June 1999. He served as President from March 1998,
and Chief Executive Officer from January 1999 until December 2001. He then
became Executive Vice President of Technology and Chairman of the Board until
September 2002. Prior to joining SpectraScience, Mr. Sievert was a founder and
President of two medical product companies; ReTech, Inc. from 1980 to 1986; and
FlexMedics Corporation from 1986 to 1995. Both Companies were sold to American
Endoscopy, Inc. and Phillips Plastics Corporation, respectively. As a former
Senior Research Health Scientist on staff at the University of Minnesota Medical
School and the Veterans Administration Medical Center, Mr. Sievert has published
more than 50 medical journal articles in the fields of gastroenterology,
endoscopy and fiber optics. He has also been awarded eight United States and
International patents. Mr. Sievert has a Bachelor of Science Degree in
Comparative Physiology from the University of Minnesota.
F. Duwaine
Townsen, Director. Mr.
Townsen co-founded and is the Managing Partner of EndPoint Late-Stage Fund of
San Diego. This fund invested exclusively in late-stage life science companies.
Mr. Townsen co-founded the Ventana Growth Funds in 1982 and served as the
group’s Managing Partner directing investments in early and middle stage
life-science, high-technology and telecommunications companies. Prior to this,
Mr. Townsen was the CEO and Chairman of Kay Laboratories, Inc., a medical device
company, where he led the company through a successful IPO in 1978 and
subsequent sale to American Hospital Supply Corporation in 1981. Following his
public accounting experience, Mr. Townsen became a founder and Chief Financial
Officer of Oceanographic Engineering Corporation and guided the company to
profitability and its sale to Dillingham Corporation in 1967. Mr.
Townsen serves as a director on the board of Sequal Technologies, a privately
held high-technology company and has held numerous directorships at private and
public companies, some of which included Agouron Pharmaceuticals, Inc.,
Brooktree Corporation, Cymer, Inc. and Maxim Pharmaceuticals,
Inc. Mr. Townsen began his career with Arthur Young & Co. after
graduating from San Diego State University.
30
Our Board
of Directors has the responsibility for establishing broad corporate policies
and for overseeing our overall performance. Members of the Board are kept
informed of our business activities through discussions with the CEO and other
officers, by reviewing analyses and reports sent to them, and by participating
in Board and committee meetings. Our bylaws provide that each of the directors
serves for a term that extends until resignation or replacement.
Independent
Directors
Other
than Mr. Hitchin all other Directors are considered to be “Independent” as that
term is defined by Rule 5605(a)(2) of the Marketplace Rules of The NASDAQ Stock
Market and are considered independent for each of the committees on which such
director serves.
Family
Relationships and Certain Arrangements
There are
no family relationships between or among the directors, executive officers or
persons nominated or charged by us to become directors or executive
officers.
There are
no arrangements or understandings between any two or more of our directors or
executive officers. There is no arrangement or understanding between any of our
directors or executive officers and any other person pursuant to which any
director or officer was or is to be selected as a director or officer and there
is no arrangement, plan or understanding as to whether non-management
shareholders will exercise their voting rights to continue to elect the current
board of directors. There are also no arrangements, agreements or understanding
between non-management shareholders that may directly or indirectly participate
in or influence the management of our affairs.
Involvement
in Certain Legal Proceedings
To the
best of our knowledge, none of our directors or executive officers, during the
past ten years, has been involved in any legal proceeding of the type required
to be disclosed under applicable SEC rules.
DIRECTOR
COMPENSATION
The
Company does not pay directors for Board of Directors’ meetings or committee
meetings attended, but reimburses each such director for reasonable travel and
out-of-pocket expenses for attendance at these meetings. Should a director be
required to expend an extraordinary amount of time performing a Company task,
he/she would be compensated at a rate of $100/hour.
Pursuant
to the SpectraScience, Inc. Amended 2001 Stock Option Plan, non-employee
directors McWilliams, Mulford and Sievert were granted non-qualified stock
options to purchase 400,000, 400,000 and 300,000 shares of Common Stock,
respectively, on July 26, 2004 at an exercise price of $0.15 per share. Dr.
Pappelbaum joined the Board on June 2006 and was granted a non-qualified stock
option to purchase 400,000 shares of Common Stock at an exercise price of $1.09
per share. Mr. Pappajohn joined the Board in June 2007 and was granted a
non-qualified stock option to purchase 400,000 shares of Common Stock at $1.10
per share. Governor Tommy Thompson joined the Board on September 20, 2007 and
was granted a non-qualified stock option to purchase 400,000 shares of Common
Stock at an exercise price of $0.75 per share. In addition, on December 4, 2009,
Thompson was granted a non-qualified stock option to purchase 400,000 shares of
Common Stock at an exercise price of $0.34 per share. On November 7, 2008
directors McWilliams, Mulford, Pappelbaum and Sievert were each granted
non-qualified stock options to purchase 400,000 shares of common stock at an
exercise price of $0.38. Mr. Townsen was granted a non-qualified stock option to
purchase 400,000 shares of Common Stock at an exercise price of $0.27 per share
on July 20, 2009. The exercise prices of the options were based on the
prevailing market price (defined as the closing price) of the Common Stock on
the date of grant.
The
options granted to employee and non-employee directors under the Amended 2001
Stock Option Plan expire ten years from the date of grant (subject to earlier
termination in the event of death or termination), are not transferable (except
by will or the laws of descent and distribution), and become exercisable in
three equal annual installments commencing on the date of grant except for the
November 7, 2008, July 20, 2009 and December 4, 2009 grants which commence
vesting in three equal annual amounts one year from the date of
grant.
The
following table shows the compensation earned by each of our non-employee
directors as of the year ended December 31, 2009:
Name
|
Option
Awards
($)
|
Total
|
||||||
Mark McWilliams (1)
(2)
|
$
|
42,624
|
(2)
|
$
|
46,624
|
|||
Rand Mulford (3)
|
$
|
16,271
|
(3)
|
$
|
16,271
|
|||
John Pappajohn (4)
|
$
|
60,269
|
(4)
|
$
|
60,269
|
|||
Stanley J. Pappelbaum, M.D.
(1)
(5)
|
$
|
42,624
|
(5)
|
$
|
42,624
|
|||
Chester Sievert
(6)
(7)
|
$
|
42,624
|
(7)
|
$
|
42,624
|
|||
Tommy Thompson (8)
(9)
|
$
|
95,566
|
(9)
|
$
|
95,566
|
|||
F.
Duwaine Townsen (8)(10)
|
$
|
13,472
|
(10)
|
$
|
13,472
|
31
|
(1)
|
The
aggregate number of stock awards and options awards issued and outstanding
as of December 31, 2009 are 0 and
800,000.
|
|
(2)
|
On
November 7, 2008, Mr. McWilliams was granted a non-qualified stock option
at an exercise price of $0.38 per share. The option vests one-third on
each annual anniversary date from initial grant and will be fully vested
on November 7, 2011. The $42,624 represents the non-cash stock option
expense recognized for the fiscal year ending December 31,
2009.
|
|
(3)
|
On
November 7, 2008, Mr. Mulford was granted a non-qualified stock option at
an exercise price of $0.38 per share. The option vests one-third on each
anniversary date from initial grant and will be fully vested on November
7, 2011. The $16,271 represents the non-cash stock option expense
recognized for the fiscal year ending December 31, 2009. Mr. Mulford
resigned from the Board of Directors on May 18,
2009.
|
|
(4)
|
Mr.
Pappajohn was granted a ten-year stock option to purchase 400,000 shares
of Common Stock at an exercise price of $1.10 per share on June 18, 2007,
when he became a director of the Company. The stock options vest one-third
upon grant and a subsequent one-third on each anniversary date thereafter,
becoming fully vested on June 18, 2009. The $60,279 represents the related
non-cash stock option expense recognized for the fiscal year ended
December 31, 2009. Mr. Pappajohn elected not to stand for re-election at
the Company’s Annual Meeting of Shareholders held September 21,
2009.
|
|
(5)
|
On
November 7, 2008, Dr. Pappelbaum was granted a non-qualified stock option
at an exercise price of $0.38 per share. The option vests one-third on
each anniversary date from the initial grant and will be fully vested on
November 7, 2011. The $42,624 represents the non-cash expense recognized
for the fiscal year ending December 31,
2009.
|
|
(6)
|
The
aggregate number of stock awards and options awards issued and outstanding
as of December 31, 2009 are 0 and
700,000.
|
|
(7)
|
On
November 7, 2008, Mr. Sievert was granted a non-qualified stock option at
an exercise price of $0.38 per share. The option vests one-third on each
anniversary date from the initial grant and will be fully vested on
November 7, 2011. The $42,624 represents the non-cash stock option expense
recognized for the fiscal year ending December 31,
2009.
|
|
(8)
|
The
aggregate number of stock awards and options awards issued and outstanding
as of December 31, 2009 are 0 and
400,000.
|
|
(9)
|
Mr.
Thompson was granted a ten-year stock option to purchase 400,000 shares of
Common Stock at an exercise price of $0.75 per share on September 20,
2007, when he became a director of the Company. The stock options vest
one-third upon grant and a subsequent one-third on each anniversary date
thereafter, becoming fully vested on September 20, 2009. On December 4,
2009, Mr. Thompson was granted a ten-year stock option to purchase 400,000
shares of Common Stock at an exercise price of $0.34 per share. The stock
options vest one-third upon grant and a subsequent one-third on each
anniversary date thereafter, becoming fully vested on December 4, 2012.The
$95,566 represents the non-cash stock option expense recognized for the
fiscal year ended December 31, 2009. Mr. Thompson resigned from the Board
of Directors effective December 17,
2009.
|
|
(10)
|
On
July 20, 2009, Mr. Townsen was granted a non-qualified stock option to
purchase 400,000 shares of Common Stock at an exercise price of $0.27 per
share. The option vests one-third on each anniversary date from initial
grant and will be fully vested on July 20, 2012. The $13,472 represents
the non-cash stock option expense recognized for the fiscal year ending
December 31, 2009.
|
EXECUTIVE
COMPENSATION
Summary
Compensation Table.
Name and Principal Position
|
Year
|
Salary
($)
|
Option Awards
($)
|
Total
($)
|
||||||||||
Jim Hitchin - (1)
|
2009
|
$
|
88,929
|
$
|
-
|
$
|
88,929
|
|||||||
Chairman,
President and CEO
|
2008
|
$
|
161,915
|
-
|
$
|
161,915
|
||||||||
Jim Dorst – CFO (2)
|
2009
|
$
|
160,101
|
$
|
88,798
|
(3)
|
$
|
248,899
|
||||||
2008
|
$
|
152,885
|
144,297
|
(4)
|
297,182
|
|
(1)
|
Mr.
Hitchin is the Company’s Chairman, President and CEO. He does not have a
written or unwritten employment agreement and his salary is not dependent
on performance targets, goals or any other conditions. Also he is not
subject to severance and change of control
arrangements.
|
|
(2)
|
Mr.
Dorst became the Company’s Vice President of Finance and Chief Financial
Officer on December 3, 2007. He does not have a written employment
agreement, his salary is not dependent on performance targets, goals or
other conditions and he is not subject to any severance or change in
control arrangements.
|
|
|
|
(3)
|
The
$88,798 represents the non-cash stock option expense recognized for the
fiscal year ending December 31, 2009. Please see Note 3 to the notes to
the consolidated financial statements for the assumptions used to value
stock options.
|
32
|
(4)
|
The
$144,297 represents the non-cash stock option expense recognized for the
fiscal year ending December 31,
2008.
|
Outstanding Equity Awards at Fiscal
Year End. The following table describes the outstanding stock option
grants to executive officers and required additional individuals at fiscal year
end. There are no Stock Awards issued or outstanding.
Outstanding Equity Awards at Fiscal Year End
Options Awards
|
||||||||||||||||||||
Name
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
Number of Securities
Underlying
Unexercised Options
(#) Unexercisable
|
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned Options
(#)
|
Option
Exercise
Price
($)
|
Option
Expiration Date
|
|||||||||||||||
Jim
Hitchin
|
- | - | - | - | - | |||||||||||||||
Jim
Dorst
|
400,000 | - | - | $ | 0.90 |
09/07/17
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information, as of January 29, 2010, with
respect to the holdings of (1) each person who is the beneficial owner of more
than 5% of our Common Stock, (2) each of our directors, (3) each named executive
officer, and (4) all of our directors and executive officers as a
group.
Beneficial
ownership of the Common Stock is determined in accordance with the rules of the
SEC and includes any shares of Common Stock over which a person exercises shared
or sole voting or investment powers, or of which a person has a right to acquire
ownership at any time within 60 days of January 29, 2010. Except as otherwise
indicated, and subject to applicable community property laws, the persons named
in this table have sole voting and investment power with respect to all shares
of Common Stock held by them. Applicable percentage ownership in the following
table is based on 70,142,615 shares of Common Stock outstanding as of January
29, 2010, plus for each individual, any securities that individual has the right
to acquire within 60 days of January 29, 2010.
Unless
otherwise indicated below, the address of each principal shareholder is c/o
SpectraScience, Inc., 11568-11 Sorrento Valley Road, San Diego, California
92121.
Name and Address of Beneficial Owner
|
Amount and Nature
of Beneficial
Ownership (1)
|
Percent
of
Class
|
||||||
EuclidSR Partners,
LP (4)
|
8,776,371
|
12
|
%
|
|||||
Jim Hitchin (2) (3)
|
8,851,149
|
12
|
||||||
Chester E. Sievert (3) (5)
|
633,333
|
1
|
||||||
Mark McWilliams (3) (6)
|
741,666
|
1
|
||||||
Stanley Pappelbaum M.D.
(3) (6)
|
583,000
|
*
|
||||||
F. Duwaine Townsen (3)
|
-
|
*
|
||||||
Jim Dorst (2) (7)
|
400,000
|
*
|
||||||
Directors
and executive officers, as a group (six persons)
|
11,209,148
|
16
|
%
|
|
*
|
Less
than 1%
|
|
|
|
(1)
|
Beneficial
ownership is determined in accordance with Rule 13d-3(a) of the Securities
Exchange Act of 1934 and generally includes voting or investment power
with respect to securities. Except as indicated by footnotes and subject
to community property laws, where applicable, the person named above has
sole voting and investment power with respect to all shares of the Common
Stock shown as beneficially owned by him or
her.
|
|
(2)
|
Executive
Officer
|
|
(3)
|
Director
|
|
(4)
|
EuclidSR
Partners, LP owns 6,143,404 shares of Common Stock and is affiliated by
common control with EuclidSR Biotechnology Partners, which together own
8,776,371 shares. The business address for all Euclid affiliated entities
is 45 Rockefeller Plaza, Suite 3240, New York, New York
10111.
|
|
(5)
|
Includes
433,333 shares which may be acquired upon exercise of options which are
currently exercisable or which become exercisable within 60 days following
the date of this Prospectus.
|
|
(6)
|
Includes
533,333 shares which may be acquired upon exercise of options which are
currently exercisable or which become exercisable within 60 days following
the date of this Prospectus.
|
|
(7)
|
Includes
400,000 shares which may be acquired upon exercise of options which are
currently exercisable or which become exercisable within 60 days following
the date of this Prospectus.
|
34
During
the past two fiscal years, there have been no transactions or series of
transactions between us and our executive officers, directors, and the
beneficial owners of 5% or more of our Common Stock, on an as converted basis,
and certain persons affiliated with or related to these persons, including
family members, in which they had or will have a direct or indirect material
interest in an amount that exceeds the lesser of $120,000 or 1% of the average
of our total assets as of year-end for the last two completed fiscal years,
other than compensation arrangements that are otherwise required to be described
under “Executive Compensation”.
Other
than Mr. Hitchin, the remaining directors of the Company are independent in that
they have no relationship to the Company that may interfere with the exercise of
their independence from management and the Company. No independent director has
a business or family relationship with another director to the best of
management’s knowledge.
LEGAL
PROCEEDINGS
We may be
involved from time to time in various claims, lawsuits, and disputes with third
parties or breach of contract actions incidental to the normal course of
business operations. We are not aware of any material pending legal proceedings
involving our Company.
DESCRIPTION
OF SECURITIES
General
Our
authorized capital consists of 160,000,000 shares of Common Stock, par value
$0.01 per share, 40,000,000 of undesignated shares of capital stock
(“Undesignated Shares”) and 25,000,000 shares of Preferred Stock. As of January
29, 2010 there were issued and outstanding 70,142,615 shares of our Common
Stock; no other class of security was outstanding as of that
date.
Common
Stock
The
holders of our Common Stock are entitled to one vote per share on all matters to
be voted upon by those shareholders. Upon the liquidation, dissolution, or
winding up of our Company, the holders of our Common Stock will be entitled to
share ratably in all of the assets which are legally available for distribution,
after payment of all debts and other liabilities. The holders of our Common
Stock have no preemptive, subscription, redemption or conversion rights. All of
our currently outstanding shares of Common Stock are, and all of our shares of
Common Stock offered for sale under this Prospectus will be, validly issued,
fully paid and non-assessable.
Preferred
Stock
From May
through December 2009, the Company sold and has outstanding 25,000,000 shares of
Preferred Stock inclusive of an 8% cumulative dividend payable on December 31 of
each year. The Preferred Stock carries a cumulative 8% dividend which accrues
per annum and is payable each December 31 in cash or, at the election of the
Board of Directors of the Company, in Common Stock of the Company.
In the
event of Liquidation of the Company, holders of any then unconverted shares of
the Preferred Stock will be entitled to receive the Liquidation Preference
Amount before holders of Common Stock are entitled to receive any portion of the
consideration available from the liquidation of the Company. For the purposes
hereof, the “Liquidation Preference Amount” shall be equal to the sum of: (i)
the purchase price of any then unconverted Preferred Stock, and (ii) any accrued
and unpaid dividends thereon.
Holders
of the Preferred Stock may convert into shares of Common Stock at their option
at any time, in whole or in part, at an initial conversion price equal to $0.20
per share of Common Stock (the “Conversion Price”). The Conversion Price will be
adjusted proportionately for all stock splits, dividends, recapitalizations,
reclassifications, payments made to common stock holders and other similar
events. Holders of the Preferred Stock will be obligated to convert their
Preferred Stock into shares of Common Stock at the Conversion Price in the event
(“Mandatory Conversion Date”) of either (i) an underwritten public offering of
Common Stock of not less than $10 million gross proceeds and, in connection
therewith, the Common Stock becoming traded on the NYSE, NYSE AMEX or the NASDAQ
National Market System or (ii) written direction of the holders of at least 67%
of the Preferred Shares issued and outstanding at the time, or (iii) at such
time as: (x) the shares are freely tradable (either under Rule 144 or an
effective registration statement covering the Conversion Shares), and (y) the
Common Stock of the Company has:
|
·
|
Had
an average closing price for each of the 10 business days prior to the
Mandatory Conversion Date of not less than 100% of the then applicable
Conversion Price; and
|
|
·
|
Had
an average daily trading volume for each of the 10 business days prior to
the Mandatory Conversion Date of not less than 50,000
shares.
|
35
Stock
Options and Warrants Convertible into Common Stock
As of
January 29, 2010, there were outstanding stock options entitling the holders to
purchase 7,350,000 shares of Common Stock at a weighted average exercise price
of $0.58 per share and warrants entitling the holders to purchase up to
15,787,966 shares of Common Stock at a weighted average exercise price of $0.33
per share. As of January 29, 2010 the Company has an additional 3,171,392 option
shares available for grant. Warrants to purchase 15,000,000 shares of Common
Stock, subject to registration under this Prospectus, were issued from May to
December of 2009, have five-year lives, an average exercise price of $0.31 and a
cashless exercise provision.
MARKET
FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Description
of Market
Our
Common Stock is quoted on the OTCBB under the symbol SCIE.OB. The last reported
bid price of the Common Stock on January 29, 2010 was $0.40.
The
following table sets forth for the calendar period indicated; the quarterly high
and low bid prices of our Common Stock as reported by the OTC:BB. The prices
represent quotations between dealers, without adjustment for retail markup,
markdown or commission, and do not necessarily represent actual
transactions.
BID
PRICE
|
||||||||
PERIOD
|
HIGH
|
LOW
|
||||||
2009:
|
||||||||
Fourth
Quarter
|
$
|
0.50
|
$
|
0.31
|
||||
Third
Quarter
|
1.77
|
0.25
|
||||||
Second
Quarter
|
0.75
|
0.18
|
||||||
First
Quarter
|
0.28
|
0.15
|
||||||
2008:
|
||||||||
Fourth
Quarter
|
$
|
0.50
|
$
|
0.21
|
||||
Third
Quarter
|
0.68
|
0.40
|
||||||
Second
Quarter
|
1.01
|
0.61
|
||||||
First
Quarter
|
1.05
|
0.70
|
On
January 29, 2010 we had approximately 800 registered shareholders of record of
the 70,142,615 shares of our Common Stock. We estimate that there are
approximately 4,000 beneficial shareholders of our Common
Stock.
Dividend
Policy
To date,
we have not declared or paid cash dividends on our Common Stock or our Preferred
Stock. As described herein, the Preferred Stock carries an 8% cumulative
dividend payable December 31, each year. The current policy of the Board of
Directors is to retain any earnings to fund the development and growth of our
business. Any future determination to pay cash dividends will be at the
discretion of our Board of Directors, and will be dependent upon our financial
condition, results of operations, capital requirements and other factors our
board may deem relevant at the time. We intend to retain all future earnings to
finance future growth and therefore, do not anticipate paying any cash dividends
in the foreseeable future.
36
The
following table sets forth as of January 29, 2010, information on our equity
compensation plans in effect as of that date.
EQUITY
COMPENSATION PLAN INFORMATION
(a)
|
(b)
|
(c)
|
||||||
Plan category
|
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights (1)
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a))
|
|||||
Equity
compensation plans approved by security holders
|
7,350,000
|
$
|
0.58
|
3,171,392
|
||||
Equity
compensation plans not approved by security holders
|
-
|
-
|
N/A
|
|||||
Totals
|
7,350,000
|
$
|
0.58
|
3,171,392
|
2001
Amended Stock Option Plan
Our
2001 Amended Stock Option Plan (the "Option Plan") provides for the grant of
incentive stock options (ISOs") to our employees (who may also be directors) and
nonqualified stock options ("NSOs") to non-employee directors, consultants,
customers, vendors or providers of significant services. The Option plan expires
on January 30, 2011. The exercise price of any ISO may not be less than the fair
market value of the common stock on the date of grant and the term shall not
exceed ten years. The amount reserved under the Option Plan equals 15% of the
outstanding shares of the Company totaling 10,521,392 at January 29, 2010. At
January 29, 2010, we had had option grants outstanding for 7,350,000
common shares under the Plan, with 3,171,392 available for future issuance.
The
Company’s Option Plan provides that the number of shares of common stock
available for issuance under the plan shall always equal 15% of the number of
shares of common stock of the Company issued and outstanding.
37
THE
SELLING SHAREHOLDERS
The
following table presents information regarding the Selling
Shareholders. Neither the Selling Shareholders nor any of their
affiliates has held a position or office, or had any other material
relationship, with us.
Selling Shareholder
|
Shares
Beneficially
Owned Before
Offering
|
Percentage of
Outstanding Shares
Beneficially Owned
Before Offering (1)
|
Shares to be Sold
in the Offering
(1)
|
Percentage of
Outstanding Shares
Beneficially Owned
After Offering
|
||||||||||
Abadjom
As Corp. (2)
|
942,847
|
1
|
%
|
942,847
|
*
|
|||||||||
William
and Patricia Andrew (3)
|
376,750
|
*
|
376,750
|
*
|
||||||||||
Daniel
F. Barkow (4)
|
754,000
|
1
|
754,000
|
*
|
||||||||||
William
Barkow (5)
|
857,208
|
1
|
857,208
|
*
|
||||||||||
IRA
fbo John Bivona (6)
|
1,763,194
|
2
|
1,763,194
|
*
|
||||||||||
Thomas
R. and Dana Bollinger (7)
|
377,556
|
*
|
377,556
|
*
|
||||||||||
Christine
Caridi (8)
|
10,000
|
*
|
10,000
|
*
|
||||||||||
Adolfo
and Donna Carmona (9)
|
3,924,611
|
4
|
3,924,611
|
*
|
||||||||||
Carnahan
Trust, Laurie and Kevin Carnahan TTE (10)
|
3,896,343
|
4
|
3,896,343
|
*
|
||||||||||
Gus
Chafoulias (11)
|
50,000
|
*
|
50,000
|
*
|
||||||||||
Andrew
C. Chafoulias (12)
|
426,750
|
*
|
426,750
|
*
|
||||||||||
Tom
Charbonneau (13)
|
1,057,789
|
1
|
1,057,789
|
*
|
||||||||||
Toqir
Choudri (14)
|
25,000
|
*
|
25,000
|
*
|
||||||||||
John
Cotter (15)
|
376,722
|
*
|
376,722
|
*
|
||||||||||
Joseph
Dempsey (16)
|
25,000
|
*
|
25,000
|
*
|
||||||||||
Susan
Diamond (17)
|
10,000
|
*
|
10,000
|
*
|
||||||||||
Emilio
DiSanluciano (18)
|
50,000
|
*
|
50,000
|
*
|
||||||||||
Vernon
James Ellis (19)
|
3,019,333
|
3
|
3,019,333
|
*
|
||||||||||
Dr.
Dale Geiss BNC IRA (20)
|
425,278
|
*
|
425,278
|
*
|
||||||||||
Carl
George (21)
|
50,000
|
*
|
50,000
|
*
|
||||||||||
Joseph
Giamanco (22)
|
379,861
|
*
|
379,861
|
*
|
||||||||||
Eloise
Gretz (23)
|
377,553
|
*
|
377,553
|
*
|
||||||||||
Lars
Henricksen (24)
|
754,389
|
1
|
754,389
|
*
|
||||||||||
Richard
L. and Kathryn V. Hexum (25)
|
762,389
|
1
|
762,389
|
*
|
||||||||||
William
R. and Joanne S. Jellison (26)
|
3,016,167
|
3
|
3,016,167
|
*
|
||||||||||
Chris
H. Jorgensen (27)
|
377,306
|
*
|
377,306
|
*
|
||||||||||
Pradeep
Kaul (28)
|
754,972
|
1
|
754,972
|
*
|
||||||||||
Charles
Keefe (29)
|
225,967
|
*
|
225,967
|
*
|
||||||||||
Ryan
Kompelien (30)
|
379,333
|
*
|
379,333
|
*
|
||||||||||
Bernard
Krooks (31)
|
25,000
|
*
|
25,000
|
*
|
||||||||||
Kristian
Kvam (32)
|
1,508,778
|
2
|
1,508,778
|
*
|
||||||||||
Ken
Lacey (33)
|
753,667
|
1
|
753,667
|
*
|
||||||||||
Maya
Lawler (34)
|
10,000
|
*
|
10,000
|
*
|
||||||||||
Mitchell
Littman (35)
|
25,000
|
*
|
25,000
|
*
|
||||||||||
Arthur
Lynch (36)
|
25,000
|
*
|
25,000
|
*
|
||||||||||
James
Lynch (37)
|
25,000
|
*
|
25,000
|
*
|
||||||||||
Charles
Mader (38)
|
377,306
|
*
|
377,306
|
*
|
||||||||||
Frank
Mazzola (39)
|
915,709
|
1
|
915,709
|
*
|
||||||||||
Robert
A. Melnick (40)
|
188,500
|
*
|
188,500
|
*
|
||||||||||
Randall
S. Miller (41)
|
490,894
|
*
|
490,894
|
*
|
||||||||||
Sheldon
L. Miller (42)
|
1,243,412
|
1
|
1,243,412
|
*
|
||||||||||
Dale
Ragan (43)
|
1,143,750
|
1
|
1,143,750
|
*
|
||||||||||
Arne
Ramstad (44)
|
753,667
|
1
|
753,667
|
*
|
||||||||||
Redwood
Management, Inc. (45)
|
750,556
|
1
|
750,556
|
*
|
||||||||||
Jan
Rehnman (46)
|
753,611
|
1
|
753,611
|
*
|
||||||||||
Jan
Age Ronnestad (47)
|
830,133
|
1
|
830,133
|
*
|
||||||||||
Mario
Sceusa (48)
|
5,000
|
*
|
5,000
|
*
|
||||||||||
Robert
Schmidt (49)
|
75,589
|
*
|
75,589
|
*
|
||||||||||
Bruce
Seyburn (50)
|
753,444
|
1
|
753,444
|
*
|
||||||||||
Dale
W. Sobeck (51)
|
1,208,178
|
1
|
1,208,178
|
*
|
||||||||||
Per
Erick Stromso (52)
|
1,508,556
|
2
|
1,508,556
|
*
|
||||||||||
David
Stutzman (53)
|
150,689
|
*
|
150,689
|
*
|
||||||||||
Lennart
Ulvskog (54)
|
753,889
|
1
|
753,889
|
*
|
||||||||||
Natan
and Miryam Vishlinsky (55)
|
527,567
|
*
|
527,567
|
*
|
||||||||||
*
|
*
|
|||||||||||||
Total
|
40,249,213
|
36
|
%
|
40,249,213
|
*
|
38
* less
than 1.0%
(1)
|
Applicable
percentage of ownership is based on 110,391,828 shares of our Common Stock
outstanding as of January 29, 2010, together with securities exercisable
or convertible into shares of Common Stock within sixty (60) days of
January 29, 2010 for the selling shareholders. Beneficial ownership
is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to
securities. Shares of Common Stock are deemed to be
beneficially owned by the person holding such securities for the purpose
of computing the percentage of ownership of such person, but are not
treated as outstanding for the purpose of computing the percentage
ownership of any other person.
|
(2)
|
Includes
625,000 shares of Common Stock underlying Preferred Stock shares owned,
312,500 shares of Common Stock underlying common stock warrant and 5,347
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(3)
|
Includes
250,000 shares of Common Stock underlying Preferred Stock shares owned,
125,000 shares of Common Stock underlying common stock warrant and 1,750
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(4)
|
Includes
500,000 shares of Common Stock underlying Preferred Stock shares owned,
250,000 shares of Common Stock underlying common stock warrant and 4,000
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(5)
|
Includes
857,208 shares of Common Stock underlying Agent
Warrants.
|
(6)
|
Includes
1,000,000 shares of Common Stock underlying Preferred Stock shares owned,
500,000 shares of Common Stock underlying common stock warrants, 242,083
shares of Common Stock underlying Agent Warrants, and 21,111 shares of
Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(7)
|
Includes
250,000 shares of Common Stock underlying Preferred Stock shares owned,
125,000 shares of Common Stock underlying common stock warrant and 2,556
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(8)
|
Includes
10,000 shares of Common Stock underlying Agent
Warrants.
|
(9)
|
Includes
2,600,000 shares of Common Stock underlying Preferred Stock shares owned,
1,300,000 shares of Common Stock underlying common stock warrant and
24,611 shares of Common Stock paid as a dividend under the terms of the
Preferred Stock.
|
(10)
|
Includes
2,585,000 shares of Common Stock underlying Preferred Stock shares owned,
1,292,500 shares of Common Stock underlying common stock warrant and
18,843 shares of Common Stock paid as a dividend under the terms of the
Preferred Stock.
|
(11)
|
Includes
50,000 shares of Common Stock underlying Agent
Warrants.
|
(12)
|
Includes
250,000 shares of Common Stock underlying Preferred Stock shares owned,
125,000 shares of Common Stock underlying common stock warrants, 50,000
shares of Common Stock underlying Agent Warrants, and 1,750 shares of
Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(13)
|
Includes
700,000 shares of Common Stock underlying Preferred Stock shares owned,
350,000 shares of Common Stock underlying common stock warrant and 7,789
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(14)
|
Includes
25,000 shares of Common Stock underlying Agent
Warrants.
|
(15)
|
Includes
250,000 shares of Common Stock underlying Preferred Stock shares owned,
125,000 shares of Common Stock underlying common stock warrant and 1,722
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(16)
|
Includes
25,000 shares of Common Stock underlying Agent
Warrants.
|
(17)
|
Includes
10,000 shares of Common Stock underlying Agent
Warrants.
|
(18)
|
Includes
50,000 shares of Common Stock underlying Agent
Warrants.
|
(19)
|
Includes
2,000,000 shares of Common Stock underlying Preferred Stock shares owned,
1,000,000 shares of Common Stock underlying common stock warrant and
19,333 shares of Common Stock paid as a dividend under the terms of the
Preferred Stock.
|
(20)
|
Includes
250,000 shares of Common Stock underlying Preferred Stock shares owned,
125,000 shares of Common Stock underlying common stock warrant, 50,000
shares of Common Stock underlying Agent Warrants, and 278 shares of Common
Stock paid as a dividend under the terms of the Preferred
Stock.
|
(21)
|
Includes
50,000 shares of Common Stock underlying Agent
Warrants.
|
(22)
|
Includes
250,000 shares of Common Stock underlying Preferred Stock shares owned,
125,000 shares of Common Stock underlying common stock warrant and 4,861
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(23)
|
Includes
250,000 shares of Common Stock underlying Preferred Stock shares owned,
125,000 shares of Common Stock underlying common stock warrant and 2,553
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(24)
|
Includes
500,000 shares of Common Stock underlying Preferred Stock shares owned,
250,000 shares of Common Stock underlying common stock warrant and 4,389
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(25)
|
Includes
500,000 shares of Common Stock underlying Preferred Stock shares owned,
250,000 shares of Common Stock underlying common stock warrant and 12,389
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(26)
|
Includes
2,000,000 shares of Common Stock underlying Preferred Stock shares owned,
1,000,000 shares of Common Stock underlying common stock warrant and
16,167 shares of Common Stock paid as a dividend under the terms of the
Preferred Stock.
|
(27)
|
Includes
250,000 shares of Common Stock underlying Preferred Stock shares owned,
125,000 shares of Common Stock underlying common stock warrant and 2,306
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(28)
|
Includes
500,000 shares of Common Stock underlying Preferred Stock shares owned,
250,000 shares of Common Stock underlying common stock warrant and 2,194
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
39
(29)
|
Includes
150,000 shares of Common Stock underlying Preferred Stock shares owned,
75,000 shares of Common Stock underlying common stock warrant and 967
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(30)
|
Includes
250,000 shares of Common Stock underlying Preferred Stock shares owned,
125,000 shares of Common Stock underlying common stock warrant and 4,333
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(31)
|
Includes
25,000 shares of Common Stock underlying Agent
Warrants.
|
(32)
|
Includes
1,000,000 shares of Common Stock underlying Preferred Stock shares owned,
500,000 shares of Common Stock underlying common stock warrant and 8,778
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(33)
|
Includes
500,000 shares of Common Stock underlying Preferred Stock shares owned,
250,000 shares of Common Stock underlying common stock warrant and 3,667
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(34)
|
Includes
10,000 shares of Common Stock underlying Agent
Warrants.
|
(35)
|
Includes
25,000 shares of Common Stock underlying Agent
Warrants.
|
(36)
|
Includes
25,000 shares of Common Stock underlying Agent
Warrants.
|
(37)
|
Includes
25,000 shares of Common Stock underlying Agent
Warrants.
|
(38)
|
Includes
250,000 shares of Common Stock underlying Preferred Stock shares owned,
125,000 shares of Common Stock underlying common stock warrant and 2,306
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(39)
|
Includes
915,709 shares of Common Stock underlying Agent
Warrants.
|
(40)
|
Includes
125,000 shares of Common Stock underlying Preferred Stock shares owned,
62,500 shares of Common Stock underlying common stock warrant and 1,000
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(41)
|
Includes
325,000 shares of Common Stock underlying Preferred Stock shares owned,
162,500 shares of Common Stock underlying common stock warrant and 3,394
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(42)
|
Includes
790,000 shares of Common Stock underlying Preferred Stock shares owned,
395,000 shares of Common Stock underlying common stock warrant, 50,000
shares of Common Stock underlying Agent Warrants, and 8,412 shares of
Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(43)
|
Includes
750,000 shares of Common Stock underlying Preferred Stock shares owned,
375,000 shares of Common Stock underlying common stock warrant and 18,750
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(44)
|
Includes
500,000 shares of Common Stock underlying Preferred Stock shares owned,
250,000 shares of Common Stock underlying common stock warrant and 3,667
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(45)
|
Includes
500,000 shares of Common Stock underlying Preferred Stock shares owned,
250,000 shares of Common Stock underlying common stock warrant and 556
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(46)
|
Includes
500,000 shares of Common Stock underlying Preferred Stock shares owned,
250,000 shares of Common Stock underlying common stock warrant and 3,611
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(47)
|
Includes
550,000 shares of Common Stock underlying Preferred Stock shares owned,
275,000 shares of Common Stock underlying common stock warrant and 5,133
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(48)
|
Includes
5,000 shares of Common Stock underlying Agent
Warrants.
|
(49)
|
Includes
50,000 shares of Common Stock underlying Preferred Stock shares owned,
25,000 shares of Common Stock underlying common stock warrant and 589
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(50)
|
Includes
500,000 shares of Common Stock underlying Preferred Stock shares owned,
250,000 shares of Common Stock underlying common stock warrant and 3,444
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(51)
|
Includes
800,000 shares of Common Stock underlying Preferred Stock shares owned,
400,000 shares of Common Stock underlying common stock warrant and 8,178
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(52)
|
Includes
800,000 shares of Common Stock underlying Preferred Stock shares owned,
400,000 shares of Common Stock underlying common stock warrant and 8,178
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(53)
|
Includes
100,000 shares of Common Stock underlying Preferred Stock shares owned,
50,000 shares of Common Stock underlying common stock warrant and 689
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(54)
|
Includes
500,000 shares of Common Stock underlying Preferred Stock shares owned,
250,000 shares of Common Stock underlying common stock warrant and 5,133
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
(55)
|
Includes
350,000 shares of Common Stock underlying Preferred Stock shares owned,
175,000 shares of Common Stock underlying common stock warrant and 2,567
shares of Common Stock paid as a dividend under the terms of the Preferred
Stock.
|
PLAN OF DISTRIBUTION
The Common Stock offered by this
Prospectus is being offered by the Selling Shareholders. The Common Stock may be
sold or distributed from time to time by the Selling Shareholders directly to
one or more purchasers or through brokers, dealers, or underwriters who may act
solely as agents at market prices prevailing at the time of sale, at prices
related to the prevailing market prices, at negotiated prices, or at fixed
prices, which may be changed. The sale of the Common Stock offered by this
Prospectus may be affected in one or more of the following
methods:
-
|
ordinary brokers’
transactions;
|
|
-
|
transactions involving cross or
block trades;
|
|
-
|
through brokers, dealers, or
underwriters who may act solely as agents;
|
|
-
|
“at the market” into an existing
market for the Common Stock;
|
|
-
|
in other ways not involving market
makers or established business markets, including direct sales to
purchasers or sales effected through agents;
|
|
-
|
in privately negotiated
transactions; or
|
|
-
|
any combination of the
foregoing.
|
In order to comply with the securities
laws of certain states, if applicable, the shares may be sold only through
registered or licensed brokers or dealers. In addition, in certain states, the
shares may not be sold unless they have been registered or qualified for sale in
the state or an exemption from the registration or qualification requirement is
available and complied with.
Brokers, dealers, underwriters, or
agents participating in the distribution of the shares as agents may receive
compensation in the form of commissions, discounts, or concessions from the
Selling Shareholders and/or purchasers of the Common Stock for whom the
broker-dealers may act as agent. The compensation paid to a particular
broker-dealer may be less than or in excess of customary
commissions.
Neither we nor the Selling Shareholders
can presently estimate the amount of compensation that any agent will receive.
We know of no existing arrangements between the Selling Shareholders, any other
shareholder, broker, dealer, underwriter, or agent relating to the sale or
distribution of the shares offered by this Prospectus. At the time a particular
offer of shares is made, a Prospectus supplement, if required, will be
distributed that will set forth the names of any agents, underwriters, or
dealers and any compensation from the Selling Shareholders, and any other
required information.
We will pay all of the expenses incident
to the registration, offering, and sale of the shares to the public other than
commissions or discounts of underwriters, broker-dealers, or agents, which will
be paid by the Selling Shareholders.
This offering will terminate on the date
that all shares offered by this Prospectus have been sold by the Selling
Shareholders or at the time that the shares included in this Prospectus become
freely tradable.
TRANSFER AGENT
The transfer agent and registrar for our
Common Stock is Wells Fargo Shareowner Services, located at 161 N. Concord
Exchange, South Saint Paul, Minnesota 55075. Their telephone number is (800)
468-9716.
REPORTS TO SECURITY
HOLDERS
We file annual and quarterly reports
with the SEC. In addition, we file additional reports for matters such as
material developments or changes. Our executive officers, directors and
beneficial owners of 10% or more of our Common Stock also file reports relative
to the acquisition or disposition of our Common Stock or acquisition,
disposition or exercise of our Common Stock purchase options or warrants. These
filings are a matter of public record and any person may read and copy any
materials we file with the SEC at the SEC's Public Reference Room at 100 F
Street, N.E., Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In
addition, the SEC maintains an Internet site at http://www.sec.gov that contains
reports, proxy and information statements, and other information regarding
issuers, including us, that file electronically with the SEC. We are not
required to deliver an annual report with this Prospectus, nor will we do so.
However, you may obtain a copy of our annual report, or any of our other public
filings, by contacting the Company or from the SEC, as mentioned
above.
LEGAL MATTERS
The validity of the shares offered
hereby was passed upon for our Company by Fredrikson & Byron P.A., 200 South
Sixth Street, Suite 4000 Minneapolis, MN
55402.
41
EXPERTS
Our consolidated financial statements as
of December 31, 2008 included or referred to in this Prospectus have been
audited by McGladrey & Pullen, LLP, independent registered public accounting
firm and are included in this Prospectus in reliance on this firm as experts in
accounting and auditing.
Our consolidated financial statements as
of and for the year ended December 31, 2007 were audited by J.H. Cohn LLP,
independent registered public accounting firm and are included in this
Prospectus in reliance on this firm as experts in accounting and
auditing.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Insofar as indemnification for
liabilities arising under the Securities Act of may be permitted to directors,
officers or persons controlling the registrant under the registrant’s Articles
of Incorporation or Bylaws, as amended, or applicable state corporate law, the
registrant has been informed 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.
WHERE YOU CAN FIND MORE
INFORMATION
We
have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the securities offered by this Prospectus. This
Prospectus, which forms a part of the registration statement, does not contain
all the information set forth in the registration statement, as permitted by the
rules and regulations of the SEC. For further information with respect to us and
the securities offered by this Prospectus, reference is made to the registration
statement.
Statements
contained in this Prospectus as to the contents of any contract or other
document that we have filed as an exhibit to the registration statement are
qualified in their entirety by reference to the exhibits for a complete
statement of their terms and conditions. The registration statement and other
information may be read and copied at the SEC’s Public Reference Room at 100 F
Street, N.E., Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains a web site at http://www.sec.gov that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the
SEC.
We are
subject to the informational requirements of the Securities and Exchange Act of
1934 and file annual, quarterly and current reports, proxy statements and other
information with the SEC. You can read our SEC filings, including the
registration statement, over the internet at the SEC’s website at www.sec.gov. You may
also read and copy any document we file with the SEC at its public reference
facility at 100 F Street, N.E., Washington, D.C. 20549. You may also obtain
copies of the documents at prescribed rates by writing to the Public Reference
Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for further information on the operation of the public
reference facility.
42
CONSOLIDATED FINANCIAL STATEMENTS OF
SPECTRASCIENCE, INC.
Page
|
|
Fiscal
Years Ended December 31, 2008 and 2007
|
|
Report
of Independent Registered Public Accounting
Firm
|
44
|
Report
of Independent Registered Public Accounting
Firm
|
45
|
Consolidated
Balance Sheets as of December 31, 2008 and
2007
|
46
|
Consolidated
Statements of Operations for the years ended December 31, 2008 and
2007
|
47
|
Consolidated
Statements of Stockholders’ Equity from December 31, 2006 to December 31,
2008
|
48
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008 and
2007
|
49
|
Notes
to Consolidated Financial Statements
|
50
|
Quarter
Ended September 30, 2009
|
|
Consolidated
Balance Sheets
|
61
|
Consolidated
Statements of Operations
|
62
|
Consolidated
Statement of Stockholders’ Equity
|
63
|
Consolidated
Statements of Cash Flows
|
64
|
Notes
to Consolidated Financial Statements
|
65
|
43
Report of Independent Registered Public
Accounting Firm
To the Board of Directors and
Shareholders
SpectraScience, Inc. and
Subsidiary
We have audited the accompanying
consolidated balance sheet of SpectraScience, Inc. and subsidiary as of December
31, 2008 and the related consolidated statements of operations, stockholders’
equity, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the financial position of SpectraScience, Inc. and subsidiary as of December 31,
2008, and the results of their operations and their cash flows for the year then
ended, in conformity with U.S. generally accepted accounting
principles.
The Company’s financial statements have
been prepared assuming that the Company will continue as a going concern. As
discussed in Note 2 to the financial statements, the Company has incurred losses
and negative cash flows from operating activities from its inception. As of
December 31, 2008, management believes that the Company will require additional
financing to fund its operations, but cannot assure that such financing will be
available. Such matters raise substantial doubt about the Company’s ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
We were
not engaged to examine management’s assessment of the effectiveness of
SpectraScience, Inc’s internal control over financial reporting as of December
31, 2008, included in the management’s
report included
in Form 10-K and, accordingly, we do not express an opinion
thereon.
/s/ McGladrey &
Pullen
Des Moines, Iowa
March 30, 2009
44
Report of Independent Registered Public
Accounting Firm
To the Shareholders and Board of
Directors
SpectraScience, Inc.
We have audited the accompanying
consolidated balance sheet of SpectraScience, Inc. and subsidiary as of December
31, 2007, and the related consolidated statements of operations, stockholders’
equity and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the financial position of SpectraScience, Inc. and subsidiary as of December 31,
2007, and their results of operations and cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ J.H. Cohn LLP
San Diego,
California
March 27, 2008
45
SpectraScience, Inc. and
Subsidiary
Consolidated Balance
Sheets
December 31, 2008 and
2007
December 31,
2008
|
December 31,
2007
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash and cash
equivalents
|
$
|
1,618,181
|
$
|
5,188,177
|
||||
Accounts
receivable
|
23,877
|
-
|
||||||
Inventories
|
465,881
|
1,044,856
|
||||||
Prepaid expenses and other current
assets
|
85,344
|
41,437
|
||||||
Total current
assets
|
2,193,283
|
6,274,470
|
||||||
Fixed assets,
net
|
1,876,738
|
943,482
|
||||||
Patents,
net
|
3,165,550
|
3,415,117
|
||||||
TOTAL
ASSETS
|
$
|
7,235,571
|
$
|
10,633,069
|
||||
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$
|
345,762
|
$
|
155,051
|
||||
Accrued
expenses
|
88,081
|
12,463
|
||||||
Total
liabilities
|
433,843
|
167,514
|
||||||
COMMITMENTS
|
||||||||
STOCKHOLDERS’
EQUITY
|
||||||||
Undesignated capital stock,
undesignated par value, 22,750,000 shares authorized at December 31, 2008
and 2007, none issued
|
-
|
-
|
||||||
Series A Convertible Preferred
Stock, $.01 par value:
|
||||||||
Authorized - 2,250,000 shares at
December 31, 2008 and 2007. Issued and outstanding 0 and 2,000,000 shares,
respectively
|
-
|
20,000
|
||||||
Common stock, $.01 par
value:
|
||||||||
Authorized — 100,000,000
shares
|
||||||||
Issued and outstanding—68,613,598
and 58,992,994 shares at December 31, 2008 and 2007,
respectively
|
686,136
|
589,929
|
||||||
Additional paid-in
capital
|
17,835,865
|
16,430,997
|
||||||
Accumulated
deficit
|
(11,720,273
|
)
|
(6,575,371
|
)
|
||||
TOTAL STOCKHOLDERS’
EQUITY
|
6,801,728
|
10,465,555
|
||||||
TOTAL LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
$
|
7,235,571
|
$
|
10,633,069
|
See accompanying notes to the
consolidated financial statements
46
SpectraScience, Inc. and
Subsidiary
Consolidated Statements of
Operations
For the Years Ended December 31, 2008
and 2007
Year Ended
December
31,
|
||||||||
2008
|
2007
|
|||||||
Revenue
|
$
|
60,560
|
$
|
-
|
||||
Cost of
revenue
|
27,130
|
-
|
||||||
Gross
profit
|
33,430
|
|||||||
Operating
expenses:
|
||||||||
Research and
development
|
2,220,007
|
796,944
|
||||||
General and
administrative
|
2,280,867
|
1,634,109
|
||||||
Sales and
marketing
|
803,888
|
589,535
|
||||||
Total operating
expenses
|
5,304,762
|
3,020,588
|
||||||
Operating
loss
|
(5,271,332
|
)
|
(3,020,588
|
)
|
||||
Other income,
net
|
126,430
|
46,003
|
||||||
Net loss
|
(5,144,902
|
)
|
(2,974,585
|
)
|
||||
Deemed dividend on preferred
stock
|
-
|
(1,000,000
|
)
|
|||||
Net loss applicable to common
stockholders
|
$
|
(5,144,902
|
)
|
$
|
(3,974,585
|
)
|
||
Basic and diluted net loss per
share
|
$
|
(0.08
|
)
|
$
|
(0.10
|
)
|
||
Weighted average common shares
outstanding
|
66,344,469
|
41,699,789
|
See accompanying notes to the
consolidated financial statements
47
SpectraScience, Inc. and
Subsidiary
Consolidated Statements of Stockholders’
Equity
For the Years Ended December 31, 2008
and 2007
Preferred
Stock
|
Common
Stock
|
Additional
Paid-In
|
Deficit
|
Total
Stockholders’
|
||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Accumulated
|
Equity
|
||||||||||||||||||||||
Balance,
December 31, 2006
|
38,370,087
|
$
|
383,701
|
$
|
2,742,888
|
$
|
(2,600,786
|
)
|
$
|
525,803
|
||||||||||||||||||
Stock
based compensation – consultants
|
571,767
|
571,767
|
||||||||||||||||||||||||||
Stock
based compensation – employees
|
829,329
|
829,329
|
||||||||||||||||||||||||||
Stock
options exercised
|
10,000
|
100
|
1,400
|
1,500
|
||||||||||||||||||||||||
Issuance
of common stock at $0.50 per share
|
2,270,000
|
22,700
|
1,112,300
|
1,135,000
|
||||||||||||||||||||||||
Issuance
of preferred stock and warrants at $0.50 per share, net of
expenses
|
2,000,000
|
973,021
|
973,021
|
|||||||||||||||||||||||||
Deemed
dividend on preferred stock
|
$
|
20,000
|
980,000
|
(1,000,000
|
)
|
|||||||||||||||||||||||
Issuance
of common stock for the assets of LUMA Imaging
Corp.
|
11,200,000
|
112,000
|
4,912,783
|
5,024,783
|
||||||||||||||||||||||||
Sale
of common stock at $0.70 per share
|
7,142,857
|
71,428
|
4,307,509
|
4,378,937
|
||||||||||||||||||||||||
Net
loss
|
(2,974,585
|
)
|
(2,974,585
|
)
|
||||||||||||||||||||||||
Balance,
December 31, 2007
|
2,000,000
|
$
|
20,000
|
58,992,944
|
$
|
589,929
|
$
|
16,430,997
|
$
|
(6,575,371
|
)
|
$
|
10,465,555
|
|||||||||||||||
Stock
based compensation – consultants
|
51,955
|
51,955
|
||||||||||||||||||||||||||
Stock
based compensation – employees
|
940,268
|
940,268
|
||||||||||||||||||||||||||
Stock
options exercised
|
20,000
|
200
|
2,800
|
3,000
|
||||||||||||||||||||||||
Sale
of common stock at $0.70 per share
|
736,856
|
7,369
|
437,983
|
445,352
|
||||||||||||||||||||||||
Conversion
of Series A Preferred Stock
|
(2,000,000
|
)
|
(20,000
|
)
|
8,000,000
|
80,000
|
(60,000
|
)
|
-
|
|||||||||||||||||||
Conversion
of Series A Preferred Stock Warrants
|
753,798
|
7,538
|
(7,538
|
)
|
-
|
|||||||||||||||||||||||
Common
Stock issued for Services
|
110,000
|
1,100
|
39,400
|
40,500
|
||||||||||||||||||||||||
Net
loss
|
(5,144,902
|
)
|
(5,144,902
|
)
|
||||||||||||||||||||||||
Balance,
December 31, 2008
|
-
|
$
|
-
|
68,613,598
|
$
|
686,136
|
$
|
17,835,865
|
$
|
(11,720,273
|
)
|
$
|
6,801,728
|
See accompanying notes to the
consolidated financial statements
48
SpectraScience, Inc. and
Subsidiary
Consolidated Statements of Cash
Flows
For the Years Ended December 31, 2008
and 2007
Year Ended December
31,
|
||||||||
2008
|
2007
|
|||||||
OPERATING
ACTIVITIES:
|
||||||||
Net loss
|
$
|
(5,144,902
|
)
|
$
|
(2,974,585
|
)
|
||
Adjustments to reconcile net loss
to cash used in operating activities:
|
||||||||
Depreciation and
amortization
|
281,594
|
57,198
|
||||||
Stock-based compensation
employees
|
940,268
|
829,329
|
||||||
Stock-based compensation
consultants
|
51,955
|
571,767
|
||||||
Gain on disposal of fixed
assets
|
-
|
(7,150
|
)
|
|||||
Fair market value of common stock
issued for services
|
40,500
|
-
|
||||||
Changes in operating assets and
liabilities:
|
||||||||
Accounts
receivable
|
(23,877
|
)
|
-
|
|||||
Inventory
|
(179,172
|
)
|
-
|
|||||
Prepaid expenses and other
assets
|
(43,907
|
)
|
(36,909
|
)
|
||||
Accounts
payable
|
190,711
|
97,362
|
||||||
Accrued compensation and
taxes
|
75,618
|
3,177
|
||||||
Net cash used in operating
activities
|
(3,811,212
|
)
|
(1,459,811
|
)
|
||||
INVESTING
ACTIVITIES:
|
||||||||
Acquisition of fixed
assets
|
(207,136
|
)
|
(22,422
|
)
|
||||
Proceeds from the sale of
assets
|
-
|
7,150
|
||||||
Net cash used in investing
activities
|
(207,136
|
)
|
(15,272
|
)
|
||||
FINANCING
ACTIVITIES:
|
||||||||
Net proceeds from issuance of
common stock
|
445,352
|
5,513,937
|
||||||
Net proceeds from issuance of
preferred stock
|
-
|
973,021
|
||||||
Proceeds from exercise of stock
options
|
3,000
|
1,500
|
||||||
Net cash provided by financing
activities
|
448,352
|
6,488,458
|
||||||
Net increase (decrease) in cash
and cash equivalents
|
(3,569,996
|
)
|
5,013,375
|
|||||
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR
|
5,188,177
|
174,802
|
||||||
CASH AND CASH EQUIVALENTS AT END
OF YEAR
|
$
|
1,618,181
|
$
|
5,188,177
|
||||
Supplemental disclosure of
non-cash investing and financing activities:
|
||||||||
Issuance of common stock for
assets of LUMA Imaging Corp.
|
$
|
-
|
$
|
5,024,783
|
||||
Reclassification of
inventory to long-term assets
|
$
|
758,147
|
$
|
-
|
See accompanying notes to the
consolidated financial statements
49
SpectraScience, Inc. and
Subsidiary
Notes to Consolidated Financial
Statements
Note 1: Organization and Description of
Business
SpectraScience, Inc. 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. The “Company”, hereinafter, refers to
SpectraScience, Inc. and its wholly owned subsidiary Luma Imaging Corporation.
From 1996, the Company primarily focused on developing the WavSTAT Optical
Biopsy System (“WavSTAT System”).
The Company has developed and received
FDA approval to market a proprietary, minimally invasive technology that
optically illuminates tissue in real-time to distinguish between normal,
pre-cancerous or cancerous cells without the need to remove the subject cell
tissue from the body to make such determinations. The WavSTAT System operates by
using cool, safe UV laser light to optically illuminate and analyze tissue,
enabling the physician to make an instant diagnosis during endoscopy when
screening for cancer, and if warranted, to begin immediate treatment during the
same procedure. The WavSTAT is FDA approved for colon cancer
detection.
On November 6, 2007, the Company
acquired the assets of Luma Imaging Corporation (“LUMA”) in an equity
transaction accounted for as an acquisition of assets and now operates LUMA as a
wholly owned subsidiary of the Company. LUMA had acquired the assets from a
predecessor company that had developed, and received FDA approval for, a
non-invasive diagnostic imaging system that can detect cervical cancer
precursors and which utilizes an underlying technology that is similar to that
of the WavSTAT System. The addition of the LUMA technology to the Company’s
existing WavSTAT System technology provides the Company with a broad suite of
fluorescence-based intellectual property and know-how. LUMA received FDA
approval as an adjunct to colposcopy in March 2006.
To effect the LUMA acquisition the
Company issued 11,200,000 restricted common shares valued at approximately
$5,000,000. The valuation of the consideration of the approximate $5,000,000 was
determined based on the underlying value of assets received which totaled
$5,024,783, or $0.45 per share. The Company received assets including patents,
inventory and equipment. The Company capitalized $3,226,000 for the fair value
of the 28 patents acquired. The capitalized amounts were determined based upon a
market-based forecast approach which utilized comparable assumed royalty revenue
streams over several possible scenarios. Forecast cash flows were then
discounted to present value to determine valuation. Inventories and equipment
acquired were determined to have fair values of approximately $874,000 and
$924,000, respectively.
In the third fiscal quarter of 2008, the
Company began selling its products and is no longer a development stage
company.
Note 2: Going
Concern
The Company has recently begun marketing
its products. As of December 31, 2008, the Company had working capital of
$1,759,440 and cash and cash equivalents of $1,618,181. On January 30, 2009, the
Company entered into a Common Stock Purchase Agreement with Fusion Capital Fund
II (See Note 12). Under the Purchase Agreement, Fusion Capital is obligated,
under certain conditions, to purchase shares from us in an aggregate amount of
$6.0 million from time to time over a twenty-four (24) month period. However, if
the Company does not receive these funds in a timely manner, the Company may not
be able to continue as a going concern. The Company may not be able to find
alternative capital or raise capital or debt on terms that are acceptable.
Management believes that if the Fusion Capital Agreement occurs as expected,
such proceeds will be sufficient to allow the Company to sustain operations
until it attains profitability and positive cash flows from operations. However,
the Company may incur unknown expenses, or the Company may not be able to meet
the revenue forecasts which will require the Company to seek additional capital.
In such event, the Company may not be able to find such capital or raise capital
or debt on terms that are acceptable.
The accompanying financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. The
financial statements do not include any adjustments relating to the
recoverability and classification of assets or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
Note 3: Significant Accounting
Policies
Revenue Recognition
We recognize revenue, net of discounts,
from sales of our medical devices and from sales of disposable supplies related
to our medical devices, when products have been shipped, when title transfers,
when the selling price is fixed or determinable, and when collection of the
resulting receivable is reasonably assured. Terms of sale for sales are FOB
origin, reflecting that title and risk of loss are assumed by the purchaser at
the shipping point.
50
Consolidation
The accompanying consolidated financial
statements include the accounts of SpectraScience, Inc. and its wholly-owned
subsidiary Luma Imaging Corp. All significant intercompany balances and
transactions have been eliminated in consolidation.
Risks and
Uncertainties
The Company operates in an industry that
is subject to intense competition, government regulation and rapid technological
change. The Company's operations are subject to significant risk and
uncertainties including financial, operational, technological, regulatory and
other risks associated with a development stage company, including the potential
risk of business failure.
Use of Estimates
The Company prepares its consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America, which requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the financial statements.
Significant estimates made by management include, among others, realization of
long-lived assets, assumptions used to value stock options, assumptions used to
value the common stock issued and the assets acquired in the LUMA acquisition
and the realization of intangible assets. Actual results could differ from those
estimates.
Cash Equivalents
Highly liquid investments with original
maturities of three months or less when purchased are considered to be cash
equivalents. Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents.
The Company maintains its cash and cash equivalents with high-credit quality
financial institutions. At times, such amounts may exceed insured limits. At
December 31, 2008, the Company had no cash balances in excess of insured limits.
The Company has not experienced any losses in such accounts and believes it is
not exposed to any significant credit risk on its cash equivalent
accounts.
Stock-Based
Compensation
In December 2004, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(“SFAS”), 123(R), “Share-Based Payment”, (“SFAS 123(R)”) which establishes
standards for transactions in which an entity exchanges its equity instruments
for goods or services. SFAS 123(R) requires an issuer to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. SFAS 123(R) became effective for the
Company commencing January 1, 2006 using the modified prospective method. The
Company previously adopted the fair value recognition provisions of SFAS 123
“Accounting for Stock-Based Compensation” prospectively for all employee and
consultant awards granted, modified, or settled by the Successor Company on
August 2, 2004. Accordingly, SFAS 123(R) has not had a material impact on the
Company’s consolidated financial statements.
In
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
(“EITF”) No. 96-18, “Accounting for Equity Instruments That are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling Goods of Services,”
all issuances of common stock, stock options or other equity instruments to
non-employees as the consideration for goods or services received by the Company
are accounted for based on the fair value of the equity instruments issued
(unless the fair value of the consideration received can be more reliably
measured). Any options issued to non-employees are recorded in expense and
additional paid-in capital in stockholders’ equity over the applicable service
periods through the vesting date based on the fair value of the options at the
end of each period.
For the years ended December 31, 2008
and 2007, stock-based compensation was approximately $992,000 and $1,401,000,
respectively. In fiscal 2008, stock option expense was approximately $430,000
for research and development, $495,000 in general and administration and $67,000
in sales and marketing. In fiscal 2007, stock option expense was approximately
$162,000 in research and development, $982,000 in general and administrative and
$257,000 in sales and marketing.
At December 31, 2008, the Company has
one stock-based employee compensation plan (the “Option Plan"), which is
described more fully in Note 7 of the consolidated financial
statements.
The fair value of options granted were
estimated at the date of grant using a Black-Scholes option-pricing model which
includes several variables including expected life, risk free interest rate,
expected stock price volatility, stock option exercise patterns and expected
dividend yield. The Company also must estimate forfeitures for employee stock
options. The following average assumptions were used to value non-employee
options in the past two years:
51
2008
|
2007
|
|||||||
Expected
life
|
5 years
|
5 years
|
||||||
Risk-free interest
rate
|
2.63
|
%
|
4.10
|
%
|
||||
Expected
volatility
|
125
|
%
|
138
|
%
|
||||
Expected dividend
yield
|
0
|
%
|
0
|
%
|
Management used the following
assumptions to value employee options over the past two
years:
2008
|
2007
|
|||||||
Expected
life
|
5 years
|
5 years
|
||||||
Risk-free interest
rate
|
2.21
|
%
|
4.00
|
%
|
||||
Expected
volatility
|
123
|
%
|
138
|
%
|
||||
Expected dividend
yield
|
0
|
%
|
0
|
%
|
In addition to the above, management
estimated the forfeitures on employee options under the Option Plan would have
negligible effects because such forfeitures would be a very small percentage.
Management believes that options granted have been to a group of individuals
that have a high desire to see the Company succeed and have aligned themselves
to that end.
The expected lives used in the
calculations were selected by management based on past experience, forward
looking profit forecasts and estimates of what the trading price of the
Company’s stock might be at different future dates. Risk-free interest rates
used are the 5-year U.S. Treasury rate as published for the applicable
measurement dates.
Volatility is a calculation based on the
Company’s stock price and volume as calculated since the beginning of the
Successor Company and becomes a risk-measurement component included in the
Black-Scholes calculation of estimated fair value. Management computed and
tested its volatility calculation for reasonableness and found it to be
acceptable based on a number of factors including the Company’s current market
capitalization and comparisons to other companies similar to SpectraScience,
Inc.
Patents
The Company accounts for acquired
intangible assets under SFAS No. 142, “Goodwill and Other Intangible Assets”
(“SFAS 142”). On August 2, 2004, at the inception of the Successor Company, the
Company capitalized $290,000 to value eight WavSTAT System patents. On November
6, 2007, coincident with the acquisition of the LUMA assets, the Company
capitalized an additional $3,226,000 to value the 28 patents acquired. In both
cases, the capitalized amounts were determined based upon a market-based
forecast approach which utilized comparable assumed royalty revenue streams over
several possible scenarios. These forecast cash flows were then discounted to
present value to determine valuation.
All patents are amortized over the
shorter of their remaining legal lives or estimated economic lives. When
acquired, the WavSTAT System patents had an average remaining useful life of 14
years, while the LUMA patents had an average remaining life of approximately 16
years. Amortization expense associated with patents for the fiscal years ended
December 31, 2008 and 2007 was $249,567 and $53,945, respectively. Patents are
reported net of accumulated amortization of $350,450 and $100,883 at December
31, 2008 and 2007, respectively. Amortization expense in each of the five years
subsequent to December 31, 2008 is expected to approximate $250,000 per
year.
Research and
Development
Research and development costs are
expensed as incurred. There may be cases in the future where certain research
and development costs such as software development costs are capitalized. For
the years ended December 31, 2008 and 2007, research and development costs were
$2,220,007 and $796,944, respectively.
Accounts Receivable
Receivables are carried at original
invoice amount less payment received and an estimate made for doubtful
receivables based on a review of all outstanding amounts on a monthly basis.
Receivables are generally considered past due 30 days after payment date as
specified on the invoice. We determine allowance for doubtful accounts by
regularly evaluating individual receivables and considering a creditor’s
financial condition, credit history and current economic conditions. Receivables
are written off when deemed uncollectible. Recoveries of previously written off
receivables previously written off are recorded when
received.
52
Inventories
Inventories are valued at the lower of
cost (using the first-in, first-out method) or market value.
Fixed Assets
Fixed assets are stated at cost less
accumulated depreciation. Depreciation expense is computed using the
straight-line method over the estimated useful lives of the related assets,
which range from two to three years. For the years ended December 31, 2008 and
2007, depreciation expense was $32,027 and $3,253, respectively. Repairs and
maintenance are charged to expense as incurred while improvements are
capitalized. Upon the sale, retirement or disposal of fixed assets, the accounts
are relieved of the cost and the related accumulated depreciation with any gain
or loss recorded to the consolidated statements of operations. The fixed asset
account balance at December 31, 2008 and 2007 includes approximately $1,837,000
and $924,000 of LUMA equipment and parts, respectively. The LUMA equipment will
be depreciated at the time the machines are placed into
service.
Fair Value of Financial
Instruments
The carrying amount of the Company's
cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximate their estimated fair values due to the short-term
maturities of those financial instruments.
Long-Lived Assets
SFAS No.144 “Accounting for the
Impairment or Disposal of Long-Lived Assets”, addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS 144 requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable. If
the cost basis of a long-lived asset is greater than the projected future
undiscounted net cash flows from such asset, an impairment loss is recognized.
Impairment losses are calculated as the difference between the cost basis of an
asset and its estimated fair value. SFAS 144 also requires companies to
separately report discontinued operations and extends that reporting requirement
to a component of an entity that either has been disposed of (by sale,
abandonment or in a distribution to owners) or is classified as held for sale.
Assets to be disposed of are reported at the lower of the carrying amount or the
estimated fair value less costs to sell. The Company believes no impairment
exists at December 31, 2008.
Earnings
(Loss) Per Share
Under SFAS No. 128 "Earnings Per Share",
basic earnings (loss) per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of common shares
assumed to be outstanding during the period of computation. Diluted earnings per
share is computed similar to basic earnings per share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the potential common shares had been issued and
if the additional common shares were dilutive. For all periods presented, basic
and diluted loss per share are the same, as any additional common stock
equivalents would be antidilutive. Potentially dilutive shares of common stock
that have been excluded from the calculation of the weighted average number of
dilutive common shares. For the year ended December 31, 2008, there were 525,000
additional potentially dilutive shares of common stock. These additional shares
include the common stock equivalent effect of 787,966 outstanding warrants and
8,150,000 options. For the year ended December 31, 2007, there were 11,486,658
additional potentially dilutive shares of common stock due primarily to the
effect of outstanding convertible preferred stock and stock
options.
Income Taxes
Income taxes are provided for the tax
effects of transactions reported in the consolidated financial statements and
consist of taxes currently due plus deferred income taxes. Deferred income taxes
are recognized for temporary differences between the financial statement and tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future. Deferred income taxes are also recognized for net
operating loss carryforwards that are available to offset future taxable income
and research and development credits. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
realized.
In July 2006, the Financial Accounting
Standards Board issued Financial Interpretation No. 48 (“FIN 48”), “Accounting
for Uncertainty in Income Taxes”, which applies to all tax positions related to
income taxes subject to SFAS 109, “Accounting for Income Taxes”. FIN 48 requires
a new evaluation process for all tax positions taken. If the probability for
sustaining said tax position is greater than 50%, then the tax position is
warranted and recognition should be at the highest amount which would be
expected to be realized upon ultimate settlement. FIN 48 requires expanded
disclosure at each annual reporting period unless a significant change occurs in
an interim period. Differences between the amounts recognized in the statements
of financial position prior to the adoption of FIN 48 and the amounts reported
after adoption are to be accounted for as an adjustment to the beginning balance
of retained earnings. The Company has completed its initial evaluation and
implementation of the impact of the January 1, 2007 adoption of FIN 48 and
determined that the Company does not have uncertain tax positions on its 2004,
2005, 2006 and 2007 tax returns. Based on evaluation of the 2008 transactions
and events, the Company does not have any material uncertain tax positions that
require measurement. Because the Company had a full valuation allowance on its
deferred tax assets as of December 31, 2008 and 2007, the Company has not
recognized any tax benefits since inception.
53
Our policy is to recognize interest
and/or penalties related to income tax matters in income tax expense. We had no
accrual for interest or penalties on our consolidated balance sheets at December
31, 2008 or 2007, and have not recognized interest and/or penalties in the
consolidated statement of operations for the years ended December 31, 2008 or
2007.
We are subject to taxation in the U.S.
and the state of California. All of our tax years are subject to examination by
the US and California tax authorities due to the carryforward of unutilized net
operating losses.
Recent Accounting
Pronouncements
In June 2008, the Emerging Issues Task
Force (EITF) ratified a consensus on EITF Issue No. 07-05, “Determining Whether
an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” which
provides guidance for determining whether an equity-linked financial instrument
(or embedded feature) is indexed to an entity’s own stock. EITF Issue No. 07-5
provides for a two-step approach for the evaluation of a financial instrument’s
contingent exercise and settlement provisions to determine if the instrument is
indexed to an entity’s own stock. The Task Force reached a consensus that this
Issue should be effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. Early application is not permitted. The Company had no instruments
subject to EITF Issue No. 07-05 on December 31, 2008.
In
December 2007, the FASB issued No. 141(R), “Business Combinations” (“SFAS
141(R)”). SFAS 141(R) replaces SFAS 141 and provides greater consistency in the
accounting and financial reporting of business combinations. SFAS 141(R)
requires the acquiring entity in a business combination to recognize all assets
acquired and liabilities assumed in the transaction and any non-controlling
interest in the acquiree at the acquisition date and be measured at the fair
value as of that date. This includes the measurement of the acquirer’s shares
issued in consideration for a business combination, the recognition of
contingent consideration, the accounting for pre-acquisition gain and loss
contingencies, the recognition of capitalized in-process research and
development, the accounting for acquisition related restructuring cost accruals,
the treatment of acquisition related transaction costs and the recognition of
changes in the acquirer’s income tax valuation allowance and deferred taxes.
SFAS 141(R) will be effective for the Company on January 1, 2009 and is to be
applied prospectively. Early adoption is not permitted. Management is currently
assessing the impact, if any, that SFAS 141(R) may have on the
Company.
In November 2007, the Emerging Issues
Task Force (EITF) ratified a consensus on EITF Issue No. 07-1, “Accounting for
Collaborative Arrangements” (“EITF 07-1”) which requires participants in a
collaboration to make separate disclosures regarding the nature and purpose of
an arrangement, their rights and obligations under the arrangement, the
accounting policy for the arrangement and the income statement classification
and amounts arising from the arrangement between participants for each period an
income statement is presented. EITF 07-1 is effective for us beginning in the
first quarter of fiscal year 2009. We are currently evaluating the impact of the
provisions of EITF 07-1 on our financial position, results of operations and
cash flows and therefore, the impact of the adoption is unknown at this
time.
In June 2007, the EITF ratified a
consensus on EITF Issue No. 07-3 (“EITF 07-3”), “Accounting for Non-Refundable
Advance Payments for Goods or Services to Be Used in Future Research and
Development Activities,” which concluded that non-refundable advance payments
for goods or services for use in research and development activities should be
deferred and capitalized. EITF 07-3 is effective for us beginning in the first
quarter of fiscal year 2008. We are currently evaluating the impact of the
provisions of EITF 07-3 on our financial position, results of operations and
cash flows and therefore, the impact of the adoption is unknown at this
time.
Other accounting standards that may have
been issued or proposed by the FASB or other standards-setting bodies have had
no significant impact on the Company’s consolidated financial
statements.
Note 4: Inventories
Inventories consisted of the following
at December 31, 2008 and 2007, respectively:
December
31,
|
||||||||
2008
|
2007
|
|||||||
Raw
Materials
|
$
|
205,651
|
$
|
986,740
|
||||
Finished
Goods
|
260,230
|
58,116
|
||||||
Total
inventories
|
$
|
465,881
|
$
|
1,044,856
|
54
Note 5: Income Taxes
The significant components of deferred
tax assets as of December 31, 2008 and 2007 are shown below. A valuation
allowance has been established to offset the deferred tax assets, as realization
of such assets is uncertain.
Year Ended
December 31,
2008
|
Year Ended
December 31,
2007
|
|||||||
Deferred tax
assets:
|
||||||||
Net operating loss
carryforward
|
$
|
10,678,283
|
$
|
10,350,300
|
||||
Research and development
credits
|
634,274
|
565,200
|
||||||
Stock
compensation
|
1,221,793
|
831,700
|
||||||
Accrued liabilities and
other
|
26,085
|
17,600
|
||||||
Total deferred tax
assets
|
12,560,435
|
11,764,800
|
||||||
Valuation
allowance
|
(10,589,131
|
)
|
(9,687,800
|
)
|
||||
Net deferred tax
assets
|
1,971,304
|
2,077,000
|
||||||
Deferred tax
liabilities:
|
||||||||
Acquired
intangibles
|
(81,348
|
)
|
(89,000
|
)
|
||||
Fixed
assets
|
(710,326
|
)
|
-
|
|||||
Patents
|
(1,179,630
|
)
|
-
|
|||||
Luma asset acquisition with common
stock
|
-
|
(1,988,000
|
)
|
|||||
Total deferred tax
liabilities
|
(1,971,304
|
)
|
(2,077,000
|
)
|
||||
Net deferred
taxes
|
$
|
-
|
$
|
-
|
The following reconciles the tax
provision with the expected provision obtained by applying statutory rates to
pretax income:
Year Ended December 31,
2008
|
Year Ended December 31,
2007
|
|||||||||||||||
Amount
|
% of Pretax
Income
|
Amount
|
% of Pretax
Income
|
|||||||||||||
Income tax at federal statutory
rate
|
$
|
(1,750,000
|
)
|
34.0
|
%
|
$
|
(1,011,000
|
)
|
34.0
|
%
|
||||||
State tax provision, net of
federal tax benefit
|
(300,000
|
)
|
5.8
|
(174,000
|
)
|
5.8
|
||||||||||
Nondeductible
differences
|
28,000
|
(0.5
|
)
|
22,000
|
(0.7
|
)
|
||||||||||
Tax credits
|
(55,000
|
)
|
1.0
|
(23,000
|
)
|
0.8
|
||||||||||
Change in valuation
allowance
|
901,000
|
(17.5
|
)
|
1,180,000
|
(39.7
|
)
|
||||||||||
Expiration of net operating
losses
|
1,056,000
|
(20.5
|
)
|
-
|
-
|
|||||||||||
Other
|
120,000
|
(2.3
|
)
|
6,000
|
(0.2
|
)
|
||||||||||
Provision for income
taxes
|
$
|
-
|
0.0
|
%
|
$
|
-
|
0.0
|
%
|
At December 31, 2008, the Company had
Federal net operating loss carry-forwards of approximately $26,496,000 that
expire from 2009 through 2028. During 2008, the Company had federal net
operating losses of approximately $2,683,000 expire. In addition, the
Company had research and development tax credits of approximately $607,000 that
expire from 2012 through 2028. As a result of previous stock transactions, the
Company's ability to utilize its net operating loss carryforwards to offset
future taxable income and utilize future research and development tax credits is
subject to certain limitations under Section 382 and Section 383 of the Internal
Revenue Code due to changes in equity ownership of the
Company.
Note 6: Lease
Commitment
The Company leases its principal
facility from an unrelated third party. The facility consists of approximately
5,080 square feet of office, research and development, manufacturing, quality
testing, and warehouse space. The lease provides for monthly rental payments of
$5,334 through December 2009. Total commitment under this lease for 2009 is
approximately $64,000. For the years ended December 31, 2008 and 2007, rent
expense totaled $97,873 and $43,300, respectively.
Note 7: Stock-Based Compensation
Plans
The 2001 stock option plan (the “Option
Plan”) was amended in 2004. The Option Plan provides for the grant of incentive
stock options (“ISOs") to our full-time employees (who may also be Directors)
and nonqualified stock options ("NSOs") to non-employee directors, consultants,
customers, vendors or providers of significant services and expires on January
30, 2011. The exercise price of any ISO may not be less than the fair market
value of the common stock on the date of grant and the term shall not exceed ten
years. The amount reserved under the Plan shall equal 15% of the outstanding
shares of the Company totaling 10,292,040 at December 31, 2008. At December 31,
2008, the Company had granted 8,150,000 options under the Plan (4,216,667 of
which are exercisable), with 2,142,040 available for future
issuance.
55
Options outstanding that have vested and
are expected to vest as of December 31, 2008 are as follows:
Number of
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual Term
in
Years
|
Aggregate
Intrinsic
Value (1)
|
|||||||||||||
Vested
|
4,216,667
|
$
|
0.64
|
7.29
|
$
|
-
|
||||||||||
Expected to
vest
|
3,933,333
|
$
|
0.53
|
9.55
|
-
|
|||||||||||
Total
|
8,150,000
|
$
|
-
|
(1) These amounts represent the
difference, if any, between the exercise price and $0.24, the closing market
price of the Company’s common stock on December 31, 2008 as quoted on the
Over-the-Counter Board under the symbol “SCIE.OB”.
Additional information with respect to
stock option activity is as follows:
Outstanding
Options
|
||||||||||||||||||||
Options
Available For
Grant
|
Plan Options
Outstanding
|
Weighted
Average
Exercise
Price
Per Share
|
Weighted-
Average
Remaining
Contractual
Term
(years)
|
Aggregate
Intrinsic
Value (1)
|
||||||||||||||||
December 31,
2006
|
3,281,114
|
2,330,000
|
$
|
0.42
|
||||||||||||||||
Options
granted
|
(3,552,000
|
)
|
3,552,000
|
$
|
0.89
|
|||||||||||||||
Options
exercised
|
10,000
|
(10,000
|
)
|
$
|
0.15
|
|||||||||||||||
Options
forfeited
|
77,000
|
(77,000
|
)
|
$
|
0.85
|
|||||||||||||||
Additional options
authorized
|
3,237,828
|
|||||||||||||||||||
December 31,
2007
|
3,053,942
|
5,795,000
|
$
|
0.70
|
||||||||||||||||
Options
granted
|
(3,050,000
|
)
|
3,050,000
|
$
|
0.42
|
|||||||||||||||
Options
exercised
|
20,000
|
(20,000
|
)
|
$
|
0.15
|
|||||||||||||||
Options
forfeited
|
675,000
|
(675,000
|
)
|
$
|
0.89
|
|||||||||||||||
Additional options
authorized
|
1,443,098
|
-
|
$
|
|||||||||||||||||
December 31,
2008
|
2,142,040
|
8,150,000
|
$
|
0.58
|
9.55
|
$
|
-
|
|||||||||||||
Exercisable December 31,
2008
|
4,216,667
|
$
|
0.64
|
7.29
|
$
|
-
|
The total intrinsic value of options
exercised during the years ended December 31, 2008 and 2007 was $13,000 and
$10,700, respectively. At December 31, 2008, total unrecognized estimated
employee and director compensation cost related to non-vested stock options
granted prior to that date is $1,605,130, which is expected to be recognized
over approximately 3 years.
For the fiscal year ended December 31,
2008, the Company granted stock options to purchase 3,050,000 common shares to
employees and directors. At the time of grant, those options were estimated to
have an aggregate fair value of approximately $1,070,000. For the fiscal year
ended December 31, 2007, the Company granted stock options to purchase 2,341,667
common shares to employees and directors. At the time of grant, these options
were estimated to have an aggregate fair value of approximately
$2,005,000.
Note 8: Undesignated Capital
Stock
The Company’s Articles of Incorporation
authorize 25,000,000 of undesignated shares of capital stock with undesignated
par value. On June 12, 2007, the Company’s Articles of Incorporation were
amended to designate 2,250,000 of the Company’s undesignated capital stock as
Series A Convertible Preferred Stock with par value of $0.01 per share. On
December 31, 2008 there remained 22,750,000 undesignated shares of capital
stock. The undesignated stock may be issued in one or more series as determined
from time to time by the Board of Directors. Any series authorized for issuance
by the Board of Directors may be senior to the common stock with respect to any
distribution if so designated by the Board of Directors upon issuance of the
shares of that series. The Board of Directors are granted the express authority
to fix by resolution any other designations, powers, preferences, rights
(including voting rights), qualifications, limitations or restrictions with
respect to any particular series created from the undesignated stock prior to
issuance thereof.
Note 9: Equity
Transactions
Fiscal Year Ended December 31,
2008
56
Common Stock
In December 2008, the Company issued
100,000 restricted common shares to Fusion Capital in payment of expenses
related to a proposed financing. The fair value of the shares was determined to
be, and the company capitalized an amount of $33,000, based upon the market
value of the stock on the date of issuance. This transaction was exempt from the
registration requirements of the Securities Act of 1933 pursuant to Regulation D
promulgated under the Securities Act of 1933.
In June 2008, the Company issued 10,000
restricted common shares to a vendor for services. The fair value of the shares
was determined to be $7,500, and the company recognized expense in the amount of
$7,500, based upon the market value of the stock on the date of
issuance.
In May 2008, the Company issued 121,470
shares of Common Stock to accredited investors at a price of $0.70 per share for
an aggregate consideration of $85,000 in the final closing tranche of the
Financing. The Company received net cash proceeds of approximately $68,000 after
placement agent commissions and expenses of approximately $17,000. This
transaction was exempt from the registration requirements of the Securities Act
of 1933 pursuant to Regulation D promulgated under the Securities Act of
1933.
In February 2008, the Company issued
615,386 shares of Common Stock to accredited investors at a price of $0.70 per
share for an aggregate consideration of $430,770. The Company received net cash
proceeds of approximately $377,000 after placement agent commissions and
expenses of $42,770. This transaction was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Regulation D promulgated
under the Securities Act of 1933.
Series A Convertible Preferred
Stock
In March 2008, the holder of 2,000,000
shares of Series A Convertible Preferred stock converted his shares into
8,000,000 shares of restricted Common Stock. The Series A Convertible Preferred
Stock was converted into Common Stock at a conversion price of $0.125 per share.
The Company received no proceeds as a result of the transaction. This
transaction was exempt from the registration requirements of the Securities Act
of 1933 pursuant to Regulation D promulgated under the Securities Act of
1933.
Series A Convertible Preferred Stock
Warrants
In December 2008 the holders of 71,250
of the Company’s Series A Preferred Warrants effected a cashless exercise of
their warrants in exchange for 147,981 restricted common shares. The Company
received no proceeds as a result of the exercise. This transaction was exempt
from the registration requirements of the Securities Act of 1933 pursuant to
Regulation D promulgated under the Securities Act of 1933.
In May 2008 the holders of 153,750 of
the Company’s Series A Preferred Warrants effected a cashless exercise of their
warrants in exchange for 521,249 restricted common shares. The Company received
no proceeds as a result of the exercise. This transaction was exempt from the
registration requirements of the Securities Act of 1933 pursuant to Regulation D
promulgated under the Securities Act of 1933.
In April 2008 a holder of 25,000 of the
Company’s Series A Preferred Warrants effected a cashless exercise of his
warrants in exchange for 84,568 restricted common shares. The Company received
no proceeds as a result of the exercise. This transaction was exempt from the
registration requirements of the Securities Act of 1933 pursuant to Regulation D
promulgated under the Securities Act of 1933.
Common Stock Purchase
Warrants
In May 2008, as additional consideration
associated with a private placement of Common Stock, the Company issued 73,681
five-year cashless warrants to purchase an equal number of common shares at
$0.80 per share to Advanced Equities, Inc., the placement agent associated with
the placement. The Company is obligated to reserve 73,681 common shares under
these warrants and the shares underlying the warrants are subject to a
registration rights agreement. This transaction was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Regulation D promulgated
under the Securities Act of 1933.
Stock Options
In May 2008, 20,000 stock options held
by an employee were exercised. The Company received net proceeds of $3,000 as a
result of the exercise.
57
Fiscal Year Ended December 31,
2007
Common Stock
In December 2007, the Company issued
7,142,857 shares of Common Stock to accredited investors at a price of $0.70 per
share. The Company received net cash of approximately $4,379,000 after placement
agent commissions and expenses of $600,000 and other transaction expenses of
approximately $21,000. This transaction was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Regulation D promulgated
under the Securities Act of 1933.
In November 2007, the Company issued
11,200,000 shares of restricted Common Stock to accredited investors in exchange
for the assets of LUMA Imaging Corporation. The price paid was based on the
fair-value of the underlying assets received, which totaled approximately
$5,025,000 or $0.45 per share. This transaction was exempt from registration
pursuant to Section 4(2) promulgated under the Securities Act of
1933.
From March through May of 2007, the
Company issued 2,270,000 shares of Common Stock at a price of $0.50 per share to
accredited investors for $1,135,000 in cash. This transaction was exempt from
the registration requirements of the Securities Act of 1933 pursuant to
Regulation D promulgated under the Securities Act of 1933.
Series A Convertible Preferred
Stock
On June 12, 2007, the Company’s Articles
of Incorporation were amended to designate 2,250,000 of the Company’s
undesignated capital stock as Series A Convertible Preferred Stock (the
“Preferred”) with par value $0.01 per share. At issuance, the Preferred is
convertible into an equal number of shares of the Company’s common stock based
upon an initial conversion price of $.50 per share and carries a liquidation
preference of like amount. On December 31, 2007, the Preferred conversion price
reset to $0.125 per share based upon the inability of the Company to attain
certain revenue levels through that date. In addition, the Preferred has rights
which provide for (i) dividend payments senior to those with respect to common
shares, (ii) voting rights equal to the number of common shares into which the
Preferred is convertible, (iii) automatic conversion in the event either of an
underwritten public offering exceeding $30 million in gross proceeds to the
Company at an offering price in excess of $2.00 per share or approval of 67% of
the Preferred holders and (iv) adjustments to the conversion price in the event
of stock dividends, stock splits or other effective stock subdivisions. If the
Company declares a dividend or a distribution on any common stock of the
Company, the Company shall pay a dividend or make a distribution on all
outstanding shares of Preferred in an amount per share equal to the maximum
amount paid or set aside for all shares of common stock into which each such
share of Preferred could then be converted. On June 15, 2007, the Company sold
2,000,000 shares of its Preferred, to three accredited investors for gross
proceeds of $1,000,000 in cash. As additional consideration for the purchase of
the Preferred, the Company issued five-year warrants to purchase 250,000
additional shares of Preferred at an initial exercise price of $0.50 per share.
The Company is also required to reserve 250,000 shares of Preferred for issuance
in relation to the warrants.
The convertible feature of the Preferred
and the terms of the warrants provide for a rate of conversion or exercise that
was below market value at issuance. Such feature, as it specifically relates to
the convertible feature of the Preferred, is characterized as a "Beneficial
Conversion Feature" ("BCF"). Pursuant to EITF Issue No. 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" (“EITF 98-5”) and EITF No. 00-27, "Application of
EITF Issue No. 98-5 to Certain Convertible Instruments," the estimated relative
fair values of the Preferred and the warrants, in approximate amounts of
$782,000 and $218,000, respectively, were calculated assuming the most favorable
conversion price determinable to the Preferred shareholders. The value of the
BCF was determined by the intrinsic value method and the fair value of the
warrants was determined by the Black-Scholes option-pricing model at the date of
issuance. The warrant fair value was determined assuming a five-year term, stock
volatility of 140%, and a risk-free interest rate of 5.10%. The stand-alone fair
value of the BCF was determined to be substantially higher than the proceeds
received and, accordingly, the value assigned to the BCF was limited to the
gross proceeds received from the offering. Per the guidance of EITF 98-5, the
value of the BCF and warrants are treated as a deemed dividend to the Preferred
shareholders and, due to the potential immediate convertibility of the Preferred
stock at issuance, is recorded as an increase to both additional paid-in-capital
and deficit accumulated at the time of issuance.
Series A Convertible Preferred Stock
Purchase Warrants
In June 2007, the Company issued
five-year warrants to accredited investors to purchase 250,000 shares of Series
A Preferred at $0.50 per share. This transaction was exempt from the
registration requirements of the Securities Act of 1933 pursuant to Regulation D
promulgated under the Securities Act of 1933.
58
Common Stock Purchase
Warrants
In December 2007, the Company issued
714,285 five-year warrants to purchase Common Stock at $0.80 per share to
Advanced Equities, Inc., the Placement Agent associated with the December
private equity financing. This transaction was exempt from the
registration requirements of the Securities Act of 1933 pursuant to Regulation D
promulgated under the Securities Act of 1933.
Stock Options
From March through June of 2007, an
employee exercised stock options to acquire 10,000 common shares for an
aggregate purchase price of $1,500.
Note 10: Related Party
Transactions
In June 2007, a director of the Company,
Mr. John Pappajohn, coincident with his becoming a director purchased $925,000
of the Company’s Series A Preferred Stock. As an inducement to engage in the
Preferred transaction Mr. Pappajohn also received 213,250 warrants to purchase
an equal number of Preferred shares at a conversion price of $0.50 per share.
Also coincident with becoming a director, Mr. Pappajohn was granted a stock
option to purchase 400,000 shares of common stock at an exercise price of $1.10
which, at the time of grant, was determined to have a fair value of
approximately $394,000. On December 31, 2007, Mr. Pappajohn invested an
additional $383,000 and purchased 547,142 shares of unregistered common stock as
a part of the initial closing of the Company’s Regulation D private placement
offering. In March 2008, pursuant to the terms of the Certificate of Designation
of the Series A Preferred Stock, Mr. Pappajohn and related entities converted
Preferred Stock into 8,000,000 shares of restricted common
stock.
In November 2007, coincident with the
Company’s purchase of the assets of Luma Imaging Corporation for 11,200,000
shares of restricted common stock, the related entities of Euclid SR Partners,
LP, Euclid SR Biotechnology Partners LP and Euclid Partners IV, LP (“Euclid”)
received 9,968,000 of the restricted common stock shares issued. This stock had
an estimated fair value of $4,984,000 at the time of acquisition. On December
31, 2007, Euclid purchased an additional 357,142 shares of common stock for
$250,000 as a part of the initial closing of the Company’s Regulation D private
placement offering. The Company had no relationship with Euclid Partners, or any
of Euclid’s affiliates, prior to the acquisition. The nature of the Company’s
relationship arose out of and exists solely as a result of the acquisition and
had no effect on our accounting for the transaction.
On November 7, 2008, the Board of
Directors approved the grant of 400,000 options to non-employee directors
Messrs. Mulford, McWilliams, Pappelbaum and Sievert. The terms are as
follows: 1/3 of the grant will vest after one year and the remaining options
will vest an additional 1/3 over each of the next three years. The options
were granted at the closing price of our Common Stock on the date of
grant.
Note 11: License
Agreement
The Company is the exclusive licensee
through the Massachusetts General Hospital of U.S. Patent number 5,843,000
entitled, “Optical Biopsy Forceps and Method of Diagnosing Tissue” and a pending
international patent application. This license agreement requires a royalty be
paid on sales of the patent on products using claims described within the patent
under the license. For the fiscal year ended December 31, 2008, revenues have
been generated from sales of products using this patent and royalties in an
amount of $670 have been paid.
Note 12: Subsequent
Events
Fusion Capital
Transaction
On January 30, 2009, we entered into a
Common Stock Purchase Agreement with Fusion Capital Fund II, an Illinois limited
liability company. Under the Purchase Agreement, Fusion Capital is obligated,
under certain conditions, to purchase shares from us in an aggregate amount of
$6.0 million from time to time over a twenty-four (24) month period. Under
the terms of the Purchase Agreement, Fusion Capital has received a commitment
fee consisting of 1,094,017 shares of our common stock. Also, we will
issue to Fusion Capital an additional 547,009 shares as a commitment fee
pro-rata as we receive the $6.0 million of future funding. In
addition, in December 2008, we issued 100,000 shares to Fusion Capital as an
expense reimbursement.
Under the Purchase Agreement and the
associated Registration Rights Agreement we are required to register 13,000,000
common shares comprised of: (1) 1,094,017 shares which have already been issued,
(2) an additional 547,009 shares which we may issue in the future as a
commitment fee pro rata as we receive the $6.0 million of future funding, (3)
100,000 shares we previously issued to Fusion Capital as an expense
reimbursement and (4) at least 11,558,974 shares which we may sell to Fusion
Capital after a registration statement is declared effective. Under the Purchase
Agreement, we have the right but not the obligation to sell more than the
13,300,000 shares to Fusion Capital. As of the date hereof, we do not currently
have any plans or intent to sell to Fusion Capital any shares beyond the
13,300,000 shares offered hereby. However, if we elect to sell more
than the 13,300,000 shares (which we have the right but not the obligation to
do), we must first register under the Securities Act any additional shares we
may elect to sell to Fusion Capital before we can sell such additional
shares. The number of shares ultimately offered for sale by Fusion
Capital is dependent upon the number of shares purchased by Fusion Capital under
the Purchase Agreement.
59
We do not have the right to commence any
sales of our shares to Fusion Capital until the SEC has declared effective a
registration statement. After the SEC has declared effective such registration
statement, generally we have the right but not the obligation from time to time
to sell our shares to Fusion Capital in amounts between $25,000 and $1.0 million
depending on certain conditions. We have the right to control the timing and
amount of any sales of our shares to Fusion Capital. The purchase
price of the shares will be determined based upon the market price of our shares
without any fixed discount at the time of each sale. Fusion Capital
shall not have the right nor the obligation to purchase any shares of our common
stock on any business day that the price of our common stock is below
$0.15. There are no negative covenants, restrictions on future
fundings, penalties or liquidated damages in the Purchase Agreement or the
Registration Rights Agreement. The Purchase Agreement may be terminated by us at
any time at our discretion without any cost to us. The Purchase
Agreement provides that neither party has the ability to amend the Purchase
Agreement and the obligations of both parties are
non-transferable.
60
SPECTRASCIENCE,
INC.
SpectraScience,
Inc. and Subsidiary
Consolidated
Balance Sheets
September
30, 2009 and December 31, 2008
|
September 30,
2009
|
December 31,
2008
|
||||||
(Unaudited)
|
(Audited)
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$
|
1,315,232
|
$
|
1,618,181
|
||||
Accounts
Receivable (net)
|
24,952
|
23,877
|
||||||
Inventories
(net of allowances)
|
374,581
|
465,881
|
||||||
Prepaid
expenses and other current assets
|
254,351
|
85,344
|
||||||
Total
current assets
|
1,969,116
|
2,193,283
|
||||||
Fixed
assets, net
|
1,710,261
|
1,876,738
|
||||||
Patents,
net
|
2,978,375
|
3,165,550
|
||||||
TOTAL
ASSETS
|
$
|
6,657,752
|
$
|
7,235,571
|
||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$
|
271,363
|
$
|
345,762
|
||||
Accrued
liabilities
|
195,683
|
88,081
|
||||||
Total
current liabilities
|
467,046
|
433,843
|
||||||
STOCKHOLDERS’
EQUITY
|
||||||||
Series
B Convertible Preferred Stock, $.01 par value:
|
||||||||
Authorized
– 15,000,000; shares issued and outstanding – 8,340,000 shares at
September 30, 2009 (no shares at December 31, 2008) $1,668,000 liquidation
value plus accumulated and unpaid dividends of $21,811 as of September 30,
2009
|
83,400
|
-
|
||||||
Common
stock, $.01 par value:
|
||||||||
Authorized—160,000,000
shares
|
||||||||
Issued
and outstanding 70,107,615 shares at September 30, 2009 (68,613,598 shares
at December 31, 2008)
|
701,076
|
686,136
|
||||||
Additional
paid-in capital
|
20,946,634
|
17,835,865
|
||||||
Accumulated
(deficit)
|
(15,540,404
|
)
|
(11,720,273
|
)
|
||||
TOTAL
STOCKHOLDERS’ EQUITY
|
6,190,706
|
6,801,728
|
||||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
6,657,752
|
$
|
7,235,571
|
Note: The
balance sheet at December 31, 2008 has been derived from the audited financial
statements at that date but does not include all of the information required by
accounting principles generally accepted in the United States of America for
complete financial statements.
See
accompanying notes to unaudited condensed financial statements.
61
SpectraScience,
Inc. and Subsidiary
CONDENSED
STATEMENTS OF OPERATIONS
(Unaudited)
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenue
|
$
|
1,875
|
$
|
52,010
|
$
|
122,266
|
$
|
60,560
|
||||||||
Cost
of revenue
|
638
|
22,079
|
81,418
|
27,130
|
||||||||||||
Gross
profit
|
1,237
|
29,931
|
40,848
|
33,430
|
||||||||||||
Operating
expenses:
|
||||||||||||||||
Research
and development
|
445,888
|
550,283
|
1,180,051
|
1,619,550
|
||||||||||||
General
and administrative
|
565,130
|
389,159
|
1,555,441
|
1,696,865
|
||||||||||||
Sales
and marketing
|
104,479
|
167,419
|
288,587
|
593,254
|
||||||||||||
Total
operating expenses
|
1,115,497
|
1,106,861
|
3,024,079
|
3,909,669
|
||||||||||||
Operating
(loss)
|
(1,114,260
|
)
|
(1,076,930
|
)
|
(2,983,231
|
)
|
(3,876,239
|
)
|
||||||||
Other
expense (income), net
|
(725
|
)
|
(24,021
|
)
|
21
|
(113,112
|
)
|
|||||||||
Net
(Loss)
|
(1,113,537
|
)
|
(1,052,909
|
)
|
(2,983,252
|
)
|
(3,763,127
|
)
|
||||||||
Deemed
Dividend on Preferred Stock
|
(544,924
|
)
|
-
|
(836,879
|
)
|
-
|
||||||||||
Accrued
but Unpaid Dividend on Preferred Stock
|
(21,811
|
)
|
-
|
(21,811
|
)
|
-
|
||||||||||
Net
(loss) applicable to common stockholders
|
$
|
(1,680,272
|
)
|
(1,052,909
|
)
|
$
|
(3,841,942
|
)
|
$
|
(3,763,127
|
)
|
|||||
Basic
and diluted net (loss) per share
|
$
|
(0.02
|
)
|
$
|
(0.02
|
)
|
$
|
(0.06
|
)
|
$
|
(0.06
|
)
|
||||
Weighted
average common shares outstanding
|
69,774,282
|
68,365,617
|
69,669,059
|
66,657,026
|
See
accompanying notes to unaudited condensed financial statements.
62
SpectraScience,
Inc. and Subsidiary
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
For the
nine months ended September 30, 2009
(Unaudited)
|
Preferred Stock
|
Common Stock
|
Additional
Paid-In
|
Accumulated
|
Total
Stockholders’
|
|||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
(Deficit)
|
Equity
|
|||||||||||||||||||||
Balance,
December 31, 2008
|
-
|
$
|
-
|
68,613,598
|
$
|
686,136
|
$
|
17,835,865
|
$
|
(11,720,273
|
)
|
$
|
6,801,728
|
|||||||||||||||
Stock
based compensation - consultants
|
-
|
-
|
-
|
-
|
147,690
|
-
|
147,690
|
|||||||||||||||||||||
Stock
based compensation - employees
|
-
|
-
|
-
|
-
|
456,397
|
-
|
456,397
|
|||||||||||||||||||||
Exercise
of stock options
|
-
|
-
|
400,000
|
4,000
|
56,000
|
-
|
60,000
|
|||||||||||||||||||||
Issuance
of Common Stock
|
-
|
-
|
1,094,017
|
10,940
|
262,563
|
-
|
273,503
|
|||||||||||||||||||||
Sale
of Series B Preferred Stock and warrants
|
8,340,000
|
-
|
-
|
-
|
1,434,640
|
-
|
1,434,640
|
|||||||||||||||||||||
Deemed
Dividend on Preferred Stock
|
-
|
83,400
|
-
|
-
|
753,479
|
(836,879
|
)
|
-
|
||||||||||||||||||||
Net
loss
|
-
|
-
|
-
|
-
|
(2,983,252
|
)
|
(2,983,252
|
)
|
||||||||||||||||||||
Balance,
September 30, 2009
|
8,340,000
|
$
|
83,400
|
70,107,615
|
$
|
701,076
|
$
|
20,946,634
|
$
|
(15,540,404
|
)
|
$
|
6,190,706
|
See
accompanying notes to unaudited condensed financial statements.
63
SpectraScience,
Inc. and Subsidiary
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
Nine Months Ended
September 30,
|
|||||||
|
2009
|
2008
|
||||||
OPERATING
ACTIVITIES:
|
||||||||
Net
(loss)
|
$
|
(2,983,252
|
)
|
$
|
(3,763,127
|
)
|
||
Adjustments
to reconcile net (loss) to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
213,106
|
209,300
|
||||||
Luma
equipment write-down
|
155,755
|
|||||||
Stock-based
compensation employees
|
456,397
|
731,953
|
||||||
Stock-based
compensation consultants
|
147,690
|
41,532
|
||||||
Fair
market value of stock issued for services
|
-
|
7,500
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(1,075
|
)
|
(52,498
|
)
|
||||
Inventory
|
91,300
|
(283,182
|
)
|
|||||
Prepaid
expenses and other current assets
|
104,497
|
(6,887
|
)
|
|||||
Accounts
payable
|
(74,399
|
)
|
(37,005
|
)
|
||||
Accrued
liabilities
|
107,602
|
40,417
|
||||||
Net
cash (used in) operating activities
|
(1,782,379
|
)
|
(3,111,997
|
)
|
||||
INVESTING
ACTIVITIES:
|
||||||||
Purchase
of certificate of deposit
|
-
|
(1,000,000
|
)
|
|||||
Redemption
of certificate of deposit
|
-
|
900,000
|
||||||
Purchases
of fixed assets
|
(15,210
|
)
|
(50,222
|
)
|
||||
Net
cash (used in) investing activities
|
(15,210
|
)
|
(150,222
|
)
|
||||
FINANCING
ACTIVITIES
|
||||||||
Proceeds
from issuance of common stock
|
-
|
445,351
|
||||||
Net
proceeds from issuance of preferred stock
|
1,434,640
|
-
|
||||||
Proceeds
from exercise of stock options
|
60,000
|
3,000
|
||||||
Net
cash provided by financing activities
|
1,494,640
|
448,351
|
||||||
Net
increase (decrease) in cash and cash equivalents
|
(302,949
|
)
|
(2,813,868
|
)
|
||||
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
1,618,181
|
5,188,177
|
||||||
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$
|
1,315,232
|
$
|
2,374,309
|
||||
Supplemental
disclosure of non-cash operating and financing activities:
|
||||||||
Stock
issued at fair value for prepaid stock issuance cost
|
$
|
273,504
|
$
|
-
|
See
accompanying notes to unaudited condensed financial statements.
64
SpectraScience,
Inc.
Notes
to Unaudited Condensed Financial Statements
September
30, 2009
1. Nature of Business and Basis of
Presentation
Description
of Business
SpectraScience,
Inc. 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. From 1996, the
Company primarily focused on developing the WavSTAT ® Optical Biopsy System
(“WavSTAT System”). The “Company” refers to SpectraScience, Inc. and its wholly
owned subsidiary Luma Imaging Corporation.
The
Company has developed and received FDA approval to market a proprietary,
minimally invasive technology that optically illuminates tissue in real-time to
distinguish between normal, pre-cancerous or cancerous cells without the need to
physically remove tissue from the body to make such determination. The WavSTAT
System operates by using cool, safe laser light to analyze tissue, enabling the
physician to make an instant diagnosis during endoscopy and, if warranted, to
begin immediate treatment during the same procedure. The WavSTAT is FDA approved
for colon cancer detection.
On November 6, 2007, the Company
acquired the assets of Luma Imaging Corporation (“LUMA ® ”) and operates LUMA as a wholly
owned subsidiary of the Company. LUMA had acquired the assets from a predecessor
company that had developed and received FDA approval for, a non-invasive
diagnostic imaging system that can detect cervical cancer precursors and which
utilizes an underlying technology that is similar to that of the WavSTAT System.
The addition of the LUMA technology to the existing WavSTAT technology provides
the Company with a broad suite of fluorescence-based intellectual property and
know-how. LUMA received FDA approval as an adjunct to colposcopy in March
2006.
Basis
of Presentation
The
accompanying unaudited condensed financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to S-1 and Regulation S-X as they are prescribed for smaller
reporting companies. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary to make the financial statements not misleading have been included.
Operating results for the nine-month period ended September 30, 2009 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2009. These statements should be read in conjunction with the
Company’s audited financial statements and related notes.
Liquidity
and Going Concern
The
Company has recently begun marketing its products. As of September 30, 2009, the
Company had working capital of $1,502,070 and a cash balance of $1,315,232. In
addition, for the nine-month period ending September 30, 2009, the Company used
($1,782,379) to fund operating activities.
From May
through September 30, 2009, the Company sold 8,340,000 shares of Series B
Convertible Preferred Stock to accredited investors at a price of $0.20 per
share for an aggregate consideration of $1,668,000. The Company received net
cash proceeds of $1,434,640 after the payment of finder’s fees and expenses of
$233,360. The Series B Convertible Preferred Stock was sold as a component of a
Unit offering described in more detail under the “Shareholders’ Equity”
paragraph below.
On
January 30, 2009, the Company entered into a Common Stock Purchase Agreement
with Fusion Capital Fund II. Under the Purchase Agreement, Fusion Capital is
obligated, under certain conditions, to purchase shares from us in an aggregate
amount of $6.0 million from time to time over a twenty-four (24) month
period.
SpectraScience
expects to incur significant additional operating losses through at least 2010,
as we complete clinical trials, begin outcome-based clinical studies and
increase sales and marketing efforts to commercialize the WavSTAT systems. If we
do not receive sufficient funding, the Company may be unable to continue as a
going concern. We may incur unknown expenses or we may not be able to meet our
revenue forecast, and one or more of these circumstances would require us to
seek additional capital. We may not be able to obtain equity capital or debt
funding on terms that are acceptable. Even if the Company receives additional
funding, such proceeds may not be sufficient to allow the Company to sustain
operations until it attains profitability and positive cash flows from
operations.
The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and satisfaction of liabilities in
the normal course of business. The financial statements do not include any
adjustments relating to the recoverability and classification of assets or the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
65
2. Summary of Significant Accounting
Policies
Revenue
recognition
We
recognize revenue, net of discounts, from sales of our medical devices and sales
of disposable supplies related to our medical devices when items have been
shipped, when title transfers, when the selling price is fixed or determinable,
and when collection of the resulting receivable is reasonably assured. Terms of
sale are generally FOB origin, reflecting that title and risk of loss are
assumed by the purchaser at the shipping point.
Consolidation
The
accompanying consolidated financial statements include the accounts of
SpectraScience, Inc. and its wholly-owned subsidiary Luma Imaging Corporation.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Risks
and Uncertainties
The
Company operates in an industry that is subject to intense competition,
government regulation and rapid technological change. The Company's operations
are subject to significant risk and uncertainties including financial,
operational, technological, regulatory and other risks associated with a
development stage company, including the potential risk of business
failure.
Use
of Estimates
The
Company prepares its consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America, which
require management to make estimates and assumptions that affect the amounts
reported in the financial statements and disclosures made in the accompanying
notes to the financial statements. Significant estimates made by management
include, among others, realization of long-lived assets, assumptions used to
value stock options, and assumptions used to value the consideration issued, the
assets acquired in the LUMA acquisition and the realization of intangible
assets. Actual results could differ from those estimates.
Stock-Based
Compensation
All
issuances of stock options or other equity instruments employees and to
non-employees as the consideration for goods or services received by the Company
are accounted for based on the fair value of the equity instruments issued. Any
stock options issued to non-employees are recorded in expense and additional
paid-in capital in stockholders’ equity over the applicable service periods
using variable accounting through the vesting dates based on the fair value of
the options at the end of each period.
For the
nine-months ended September 30, 2009 and 2008, stock-based compensation was
approximately $604,000 and $773,000, respectively. Stock-based compensation
expense of approximately $195,000 and $361,000 was recognized in research and
development expenses for the nine months ended September 30, 2009 and 2008,
respectively. Stock-based compensation of approximately $439,000 and $370,000
was recognized in general and administrative expenses for the nine months ended
September 30, 2009 and 2008, respectively. Stock-based compensation expense of
approximately ($30,000) and $42,000 was recognized in sales and marketing
expense for the nine months ended September 30, 2009 and 2008, respectively. The
benefit recorded in sales and marketing stock option expense was the result of
recapturing previously recognized expense as a result of option holder’s
terminations. The Company previously adopted the fair value recognition
provisions of future accounting standards prospectively for all employee and
consultant awards granted, modified, or settled by the Company on August 2,
2004. Accordingly, changes in accounting standards as they relate to stock-based
compensation have not had a material impact on the comparability of Company’s
financial statements.
As of
September 30, 2009, the Company had one stock-based employee compensation plan
(the “Option Plan"). The Option Plan provides for the grant of incentive stock
options (“ISOs") to full-time employees (who may also be directors) and
nonqualified stock options ("NSOs") to non-employee directors, consultants,
vendors or providers of services and expires on January 30, 2011. The exercise
price of any ISO may not be less than the fair market value of the common stock
on the date of grant and the term shall not exceed ten years. The amount
reserved under the Option Plan equals 15% of the outstanding shares of the
Company, totaling 10,516,142 reserved at September 30, 2009. At September 30,
2009 the Company had outstanding 7,350,000 options under the Option Plan
representing approximately 10.48% of the outstanding shares (4,450,000 of which
were exercisable), with 3,166,142 available for future issuance. Awards under
the Company’s Option Plan generally vest over three years.
The fair
value of options granted were estimated at the date of grant using a
Black-Scholes option-pricing model which includes several variables including
expected life, risk free interest rate, expected stock price volatility, stock
option exercise patterns and expected dividend yield. The Company also must
estimate forfeitures for employee stock options. These models and assumptions
are emerging and may change future expenses by increasing or decreasing
stock-based compensation expense. Management used the following weighted average
assumptions to value all stock options for the nine months ending September 30,
2009 and 2008:
66
2009
|
2008
|
|||||||
Expected
life
|
5
years
|
5
years
|
||||||
Risk-free
interest rate
|
2.02
|
%
|
3.64
|
%
|
||||
Expected
volatility
|
122
|
%
|
133
|
%
|
||||
Expected
dividend yield
|
0
|
%
|
0
|
%
|
In
addition to the above, management estimated the forfeitures on employee options
under the Option Plan would have negligible effects because such forfeitures
would be a very small percentage. Recent forfeitures are due to layoffs which
were not expected to occur at the grant date of these options. Management
believes that options granted to remaining employees have been to a group of
individuals that have a high desire to see the Company succeed and have aligned
themselves to that end.
The
expected life used in the calculations were selected by management based on past
experience, forward looking profit forecasts and estimates of what the trading
price of the Company’s stock might be at different future dates.
The
risk-free interest rates are the 5-year U.S. Treasury rate as published at the
time of making the calculations.
Volatility
is a calculation based on the Company’s historical stock price over
approximately, the past 5 years (expected life of stock options). Management
computed and tested this volatility calculation for reasonableness and found it
to be acceptable based on a number of factors including the Company’s current
market capitalization, comparables to other companies in our area of interest,
the current development stage of the Company and management’s estimate of the
net present value of forward looking profits that has been compiled (for which
there is no assurance).
|
Options
Available
For Grant
|
Plan Options
Outstanding
|
Weighted Average
Exercise Price Share
|
Weighted-Average
Remaining
Contractual Term
(years)
|
Aggregate
Intrinsic Value
|
|||||||||||||||
Outstanding
December 31, 2008
|
2,142,040
|
8,150,000
|
$
|
0.58
|
8.38
|
|||||||||||||||
Options
granted
|
(600,000
|
)
|
600,000
|
0.29
|
10.00
|
|||||||||||||||
Options
exercised
|
400,000
|
(400,000
|
)
|
0.15
|
-
|
|||||||||||||||
Additional
options available
|
224,102
|
|||||||||||||||||||
Forfeited
or expired
|
1,000,000
|
(1,000,000
|
)
|
-
|
-
|
|||||||||||||||
Outstanding
at September 30, 2009
|
3,166,142
|
7,350,000
|
$
|
0.58
|
7.80
|
$
|
-
|
|||||||||||||
Exercisable
at September 30, 2009
|
4,450,000
|
$
|
0.71
|
6.91
|
$
|
-
|
The total
intrinsic value of options exercised during the nine months ended September 30,
2009 and 2008 was $160,000 and $13,000, respectively. At September 30, 2009,
total unrecognized estimated employee and director compensation cost related to
non-vested stock options granted prior to that date is approximately $560,000,
which is expected to be recognized over the next two years.
Impairment
or Disposal of Long-Lived Intangible Assets
Current
accounting standards address financial accounting and reporting for the
impairment or disposal of long-lived intangible assets (such as our patents).
Accounting standards require that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that their carrying amounts
may not be recoverable. If the cost basis of a long-lived asset is greater than
the projected future undiscounted net cash flows from such asset (excluding
interest), an impairment loss is recognized. Impairment losses are calculated as
the difference between the cost basis of an asset and its estimated fair value.
The Company adopted these accounting standards on August 2, 2004. Management
believes no impairment exists at September 30, 2009.
Inventories
Inventories
consisted of the following at September 30, 2009 and December 31,
2008:
|
September
30, 2009
|
December 31, 2008
|
||||||
Raw
materials
|
$
|
132,172
|
$
|
205,651
|
||||
Finished
goods
|
242,409
|
260,230
|
||||||
Totals
|
$
|
374,581
|
$
|
465,881
|
67
Earnings
(Loss) Per Share
Basic
earnings (loss) per share is computed by dividing net income (loss) available to
common shareholders by the weighted average number of common shares outstanding
during the period of computation. Diluted earnings (loss) per share is computed
similarly to basic earnings per share except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and only if the
additional common shares would be dilutive. Basic and diluted loss per share are
the same for the nine months ended September 30, 2009 and 2008, since any
additional common stock equivalents would be antidilutive. Potentially dilutive
shares of common stock that have been excluded from the calculation of the
weighted average number of dilutive common shares for the three and nine months
ended September 30, 2009 include outstanding stock options, convertible
preferred stock and warrants. As of September 30, 2009, there were 8,340,000
shares of Series B Convertible Preferred Stock, warrants to purchase 5,721,966
shares of Common Stock and 7,350,000 stock options outstanding.
Recent
Accounting Pronouncements
In April
2009, accounting standards related to “Interim Disclosures about Fair Value of
Financial Instruments” require disclosures about fair value of financial
instruments in interim and annual financial statements. These standards are
effective for periods ending after June 15, 2009. The Company adopted these
standards effective for the quarter ending September 30, 2009. The adoption did
not have an impact on the Company’s financial position or results of
operations.
In May
2009, more specific accounting standards related to “Subsequent Events”
established general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued.
The Company adopted these standards for the quarter ending June 30,
2009.
In June
2009, a new accounting standard related to the codification of all accounting
standards was issued. Under the standard, Accounting Standards Codification
(Codification) will become the source of authoritative U.S. generally accepted
accounting principles (GAAP) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (SEC) under the authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. On the effective date of
this Statement, the Codification will supersede all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become
non-authoritative. This statement is effective for financial statements issued
for interim and annual periods ending after September 15, 2009. In the FASB’s
view, the issuance of this Statement and the Codification will not change GAAP,
except for certain nonpublic nongovernmental entities. The Company does not
expect that the adoption of this Statement will have a material impact on the
Company’s financial statements.
Fair
Value of Financial Instruments
The
carrying amount of the Company’s cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate their estimated fair values
due to the short-term maturities of those financial instruments.
3.
Stockholders Equity
Common
Stock
On
January 30, 2009, we entered into a Common Stock Purchase Agreement with Fusion
Capital Fund II, an Illinois limited liability company. Under the Purchase
Agreement, Fusion Capital is obligated, under certain conditions, to purchase
shares from us in an aggregate amount of $6.0 million from time to time over a
twenty-four (24) month period. Under the terms of the Purchase
Agreement, on the date we entered into the agreement, we issued Fusion Capital a
commitment fee consisting of 1,094,017 restricted shares of our common
stock.
Series
B Convertible Preferred Stock and Warrants
On June
22, 2009, the Board of Directors designated 15,000,000 of the Company’s
undesignated capital stock as Series B Convertible Preferred Stock (the
“Preferred”) with par value of $0.01 per share. The Preferred is convertible
into an equal number of shares of the Company’s Common Stock based upon an
initial conversion price of $0.20 per share and carries a liquidation preference
of like amount plus declared but unpaid cumulative dividends. The Preferred is
entitled to receive cumulative dividends in preference to any dividend which may
be declared on the Common Stock at the rate of 8% of the original issue price.
In addition, the Preferred has rights which provide for (i) dividend payments
senior to those with respect to common shares, (ii) voting rights equal to the
number of common shares into which the Preferred is convertible and (iii)
adjustments to the conversion price in the event of stock dividends, stock
splits or other effective stock subdivisions. The Preferred is subject to
automatic conversion in the event of (a) an underwritten public offering
exceeding $10 million in gross proceeds to the Company or, (b) the approval of
67% of the Preferred holders or (c) in the event that the underlying conversion
shares become freely tradable and the average daily trading volume of the
underlying stock is not less than 50,000, nor the average closing price of the
underlying stock is not less than the conversion price then in effect for 10
consecutive trading days.
68
From May
through September 30, 2009, as a part of a Units offering, the Company sold
8,340,000 shares of its Preferred to accredited investors for an aggregate
consideration of $1,668,000. The Company received net cash proceeds of
$1,434,640 after the payment of finders’ fees and expenses of $233,360. In
addition, the Company issued five-year warrants to purchase 4,170,000 additional
shares of Common Stock at an initial exercise price of $0.30 per share and
764,000 agent warrants at an initial exercise price of $0.35 per share. The fair
value of the agent warrants as determined using the Black-Scholes Model is
approximately $249,000. The convertible feature of the Preferred and the terms
of the warrants provide for a rate of conversion or exercise that was below
market value at issuance. Such feature, as it specifically relates to the
convertible feature of the Preferred, is characterized as a “Beneficial
Conversion Feature” (“BCF”). Pursuant to existing accounting standards, the
estimated relative fair values of the BCF and the warrants, in approximate
amounts of $837,000 and $722,000, respectively, were calculated. The value of
the BCF was determined utilizing an intrinsic value method with the fair value
of the warrants determined using the Black-Scholes option-pricing model at the
date of issuance. The warrant fair values were determined assuming a five-year
term, stock volatility of between approximately 124% and 123% and risk-free
interest rates of between 1.98% and 2.47%. The stand-alone fair value of the BCF
was then determined to be higher than the remaining proceeds received and,
accordingly, the value assigned to the BCF was limited to the gross proceeds
received from the offering net of the fair value of the warrants. Per the
guidance of accounting standards, the value of the BCF is treated as a deemed
dividend to the Preferred shareholders and, due to the potential immediate
convertibility of the Preferred stock at issuance, this value is recorded as an
increase to both additional-paid-in-capital and accumulated deficit at the time
of issuance.
4.
Subsequent Events
Subsequent
events have been evaluated through February 8, 2010.
From
September 30, 2009 until the date of this Prospectus, the Company sold
16,660,000 shares of Series B Convertible Preferred Stock including common stock
purchase warrants to accredited investors to purchase 8,330,000 shares at $0.30
per share and common stock purchase warrants to purchase 1,666,000 shares at
$0.35 per share. The Company received gross proceeds of $3,332,000 from the sale
and net proceeds of $2,876,360 after payment of $455,640 in fees. As of the
date of this Prospectus, there are no other items to disclose as subsequent
events.
69
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The
following table sets forth estimated expenses expected to be incurred in
connection with the issuance and distribution of the securities being
registered. The Company will pay all expenses in connection with this
offering.
Securities
and Exchange Commission Registration Fee
|
$
|
1,205.31
|
||
Printing
and Engraving Expenses
|
$
|
1,000.00
|
||
Accounting
Fees and Expenses
|
$
|
25,000.00
|
||
Legal
Fees and Expenses
|
$
|
20,000.00
|
||
Miscellaneous
|
$
|
2,500.00
|
||
TOTAL
|
$
|
49,705.31
|
ITEM
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our
Amended Articles of Incorporation (our “Articles”) permit us to limit the
liability of our directors. Our Articles and amended bylaws
(our “Bylaws”) provide that a director of the Company shall not be personally
liable to the Company or its shareholders for monetary damages for breach of
fiduciary duty as a director, except for (i) liability based on a breach of the
duty of loyalty to the Company or the shareholders; (ii) liability for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law; (iii) liability based on the payment of an improper dividend
or an improper repurchase of the Company’s stock under Minnesota Statutes
Section 302A.559 or on violations of Minnesota state securities laws (Minnesota
Statutes, Section 80A.76); (iv) liability for any transaction from which the
director derived an improper personal benefit; or (v) liability for any act or
omission occurring prior to the date Article IV of our Amended Articles of
Incorporation became effective. If the Minnesota Business Corporation Act is
hereafter amended to authorize the further elimination or limitation of the
liability of directors, then the liability of a director of the Company, in
addition to the limitation on personal liability provided herein, shall be
limited to the fullest extent permitted by the amended Minnesota Business
Corporation Act. Any repeal or modification of this Article IV by the
shareholders of the Corporation shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a director of the
Company existing at the time of such repeal or modification.
The
provisions of our Bylaws and Articles regarding indemnification are not
exclusive of any other right we have to indemnify or reimburse our officers or
directors in any proper case, even if not specifically provided for in our
Articles or Bylaws.
We
believe that the indemnity provisions contained in our Bylaws and the limitation
of liability provisions contained in our Articles are necessary to attract and
retain qualified persons for these positions. No pending material litigation or
proceeding involving our directors, executive officers, employees or other
agents as to which indemnification is being sought exists, and we are not aware
of any pending or threatened material litigation that may result in claims for
indemnification by any of our directors or executive officers. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been informed that, in the opinion of the SEC,
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, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by us is against public policy as
expressed hereby in the Securities Act and we will be governed by the final
adjudication of such issue.
70
ITEM
15. RECENT SALES OF UNREGISTERED SECURITIES
Nine-Month
Period Ending September 30, 2009
From May
through September 2009, the Company sold 8,340,000 shares of Series B
Convertible Preferred Stock to accredited investors at a price of $0.20 per
share for an aggregate consideration of $1,668,000. The Company received net
cash proceeds of $1,434,640 after the payment of finder’s fees and expenses of
$233,360.
Fiscal
Year Ended December 31, 2008
Common
Stock
In
December 2008, the Company issued 100,000 restricted common shares to Fusion
Capital in payment of expenses related to a proposed financing. The fair value
of the shares was determined to be, and the company capitalized an amount of
$33,000, based upon the market value of the stock on the date of issuance. This
transaction was exempt from the registration requirements of the Securities Act
of 1933 pursuant to Regulation D promulgated under the Securities Act of
1933.
In June
2008, the Company issued 10,000 restricted common shares to a vendor for
services. The fair value of the shares was determined to be $7,500, and the
company recognized expense in the amount of $7,500, based upon the market value
of the stock on the date of issuance.
In
February 2008, the Company issued 615,386 shares of Common Stock to accredited
investors at a price of $0.70 per share for an aggregate consideration of
$430,770. The Company received net cash proceeds of approximately $377,000 after
placement agent commissions and expenses of $42,770. This transaction was exempt
from the registration requirements of the Securities Act of 1933 pursuant to
Regulation D promulgated under the Securities Act of 1933.
In
May 2008, the Company issued 121,470 shares of Common Stock to accredited
investors at a price of $0.70 per share for an aggregate consideration of
$85,000 in the final closing tranche of the Financing. The Company received net
cash proceeds of approximately $68,000 after placement agent commissions and
expenses of approximately $17,000. This transaction was exempt from the
registration requirements of the Securities Act of 1933 pursuant to Regulation D
promulgated under the Securities Act of 1933.
Series
A Convertible Preferred Stock
In March
2008, the holder of 2,000,000 shares of Series A Convertible Preferred stock
converted his shares into 8,000,000 shares of restricted Common Stock. The
Series A Convertible Preferred Stock was converted into Common Stock at a
conversion price of $0.125 per share. The Company received no proceeds as a
result of the transaction. This transaction was exempt from the
registration requirements of the Securities Act of 1933 pursuant to Regulation D
promulgated under the Securities Act of 1933.
Series
A Convertible Preferred Stock Warrants
In
December 2008, the holders of 71,250 of the Company’s Series A Preferred
Warrants effected a cashless exercise of their warrants in exchange for 147,981
restricted common shares. The Company received no proceeds as a result of the
exercise. This transaction was exempt from the registration requirements of the
Securities Act of 1933 pursuant to Regulation D promulgated under the Securities
Act of 1933.
In May
2008, the holders of 153,750 of the Company’s Series A Preferred Warrants
effected a cashless exercise of their warrants in exchange for 521,249
restricted common shares. The Company received no proceeds as a result of the
exercise. This transaction was exempt from the registration requirements of the
Securities Act of 1933 pursuant to Regulation D promulgated under the Securities
Act of 1933.
In April
2008 a holder of 25,000 of the Company’s Series A Preferred Warrants effected a
cashless exercise of his warrants in exchange for 84,568 restricted common
shares. The Company received no proceeds as a result of the exercise. This
transaction was exempt from the registration requirements of the Securities Act
of 1933 pursuant to Regulation D promulgated under the Securities Act of
1933.
71
Common Stock Purchase
Warrants
In May
2008, as additional consideration associated with a private placement of Common
Stock, the Company issued 73,681 five-year cashless warrants to purchase an
equal number of common shares at $0.80 per share to Advanced Equities, Inc., the
placement agent associated with the placement. The Company is obligated to
reserve 73,681 common shares under these warrants and the shares underlying the
warrants are subject to a registration rights agreement. This transaction was
exempt from the registration requirements of the Securities Act of 1933 pursuant
to Regulation D promulgated under the Securities Act of 1933.
Stock
Options
In May
2008, 20,000 stock options held by an employee were exercised. The Company
received net proceeds of $3,000 as a result of the exercise.
Fiscal
Year Ended December 31, 2007
Common
Stock
In
December 2007, the Company issued 7,142,857 shares of Common Stock to accredited
investors at a price of $0.70 per share. The Company received net cash of
approximately $4,379,000 after placement agent commissions and expenses of
$600,000 and other transaction expenses of approximately $21,000. This
transaction was exempt from the registration requirements of the Securities Act
of 1933 pursuant to Regulation D promulgated under the Securities Act of
1933.
In
November 2007, the Company issued 11,200,000 shares of restricted Common Stock
to accredited investors in exchange for the assets of LUMA Imaging Corporation.
The price paid was based on the fair-value of the underlying assets received,
which totaled approximately $5,025,000 or $0.45 per share. This transaction was
exempt from registration pursuant to Section 4(2) promulgated under the
Securities Act of 1933.
From
March through May of 2007, the Company issued 2,270,000 shares of Common Stock
at a price of $0.50 per share to accredited investors for $1,135,000 in cash.
This transaction was exempt from the registration requirements of the Securities
Act of 1933 pursuant to Regulation D promulgated under the Securities Act of
1933.
Series
A Convertible Preferred Stock
In June
2007, the Company issued 2,000,000 shares of Series A Convertible Preferred
Stock to accredited investors at a price of $0.50 per share for $1,000,000 in
cash. As of December 31, 2007, the Series A Convertible Preferred is convertible
into Common Stock. This transaction was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Regulation D promulgated
under the Securities Act of 1933.
Series
A Convertible Preferred Stock Purchase Warrants
In June
2007, the Company issued five-year warrants to accredited investors to purchase
250,000 shares of Series A Preferred at $0.50 per share. This
transaction was exempt from the registration requirements of the Securities Act
of 1933 pursuant to Regulation D promulgated under the Securities Act of
1933.
Common
Stock Purchase Warrants
In
December 2007, the Company issued 714,285 five-year warrants to purchase Common
Stock at $0.80 per share to Advanced Equities, Inc., the Placement Agent
associated with the December private equity financing. This
transaction was exempt from the registration requirements of the Securities Act
of 1933 pursuant to Regulation D promulgated under the Securities Act of
1933.
72
Fiscal
Year Ended December 31, 2006
Common
Stock
In the
second quarter of 2006, the Company issued 749,325 shares of Common Stock to
accredited investors at a price of $0.67 per share. The Company received cash
proceeds of approximately $502,000 and no commissions or other compensation was
paid. This transaction was exempt from the registration requirements of the
Securities Act of 1933 pursuant to Regulation D promulgated under the Securities
Act of 1933.
Item
16. Exhibits and Financial Statement Schedules
EXHIBITS
Exhibit No.
|
|
Description of Exhibit
|
2.1
|
Luma
Acquisition Agreement (2)
|
|
3.1
|
Amended
and Restated Articles of Incorporation (3)
|
|
3.2
|
Amended
Bylaws (10)
|
|
4.1
|
Certificate
of Creation of Series A Preferred Stock (4)
|
|
4.2
|
Stock
Purchase Warrant for Series A Preferred Stock (4)
|
|
4.3
|
Common
Stock Purchase Warrant issued to Placement Agent (5)
|
|
4.4
|
Certificate
of Designation for Series B Preferred Stock (9)
|
|
4.5
|
Stock
Purchase Warrant for Series B Preferred Stock (9)
|
|
5.1**
|
Opinion
of Counsel
|
|
10.1*
|
SpectraScience,
Inc. Amended 2001 Stock Plan (6)
|
|
10.2*
|
Form
of Directors’ Option Agreement (10)
|
|
10.3
|
Common
Stock Purchase Agreement dated as of January 30, 2009, by and between the
Company and Fusion Capital Fund II, LLC (7)
|
|
10.4
|
Registration
Rights Agreement dated as of January 30, 2009, by and between the Company
and Fusion Capital Fund II, LLC (8)
|
|
21.1**
|
Subsidiaries
of SpectraScience, Inc., (LUMA Imaging Corporation)
|
|
23.1
|
Consent
of J.H. Cohn LLP (1)
|
|
23.2
|
Consent
of McGladrey & Pullen, LLP (1)
|
|
23.3**
|
Consent
of Fredrikson & Byron, P.A. (Included in Exhibit 5.1 to this
Registration
Statement)
|
73
Management
contract or compensatory arrangement.
|
||
**
|
Previously
filed
|
|
(1)
|
Filed
herewith.
|
|
(2)
|
Incorporated
by reference to the exhibit of the same number to the Company’s Current
Report on Form 8-K (File number 000-13092) as filed with the SEC on
November 13, 2007.
|
|
(3)
|
Incorporated
by reference to the exhibit of the same number to the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2009 (File number
000-13092) as filed with the SEC on November 16, 2009.
|
|
(4)
|
Incorporated
by reference to the exhibit of the same number to the Company’s Quarterly
Report on Form 10-QSB for the quarter ended June 30, 2007 (File number
000-13092) as filed with the SEC on August 14, 2007.
|
|
(5)
|
Incorporated
by reference to the exhibit of the same number to the Company’s Annual
Report on Form 10-KSB (File number 000-13092) as filed with the SEC on
March 31, 2008.
|
|
(6)
|
Incorporated
by reference to Exhibit 10.27 to the Company’s Current Report on Form 8-K
(File number 000-13092) as filed with the SEC on August 6,
2004.
|
|
(7)
|
Incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
(File number 000-13092) as filed with the SEC on February 4,
2009.
|
|
(8)
|
Incorporated
by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
(File number 000-13092) as filed with the SEC on February 4,
2009.
|
|
(9)
|
Incorporated
by reference to the exhibit of the same number to the Company’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2009 (File number
000-13092) as filed with the SEC on August 14, 2009.
|
|
(10)
|
Incorporated
by reference to the exhibit of the same number to the Company’s
Registration Statement on Form S-1 (File number 333-158899) as filed with
the SEC on April 29, 2009.
|
ITEM
17. UNDERTAKINGS
The
undersigned registrant hereby undertakes:
1. To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) To
include any Prospectus required by Section 10(a)(3) of the Securities Act of
1933;
(b) To
reflect in the Prospectus any facts or events arising after the effective date
of this registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in this registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospects filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in the
volume and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in the
effective registration statement; and
(c) To
include any material information with respect to the plan of distribution not
previously disclosed in this registration statement or any material change to
such information in the registration statement.
2. That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
3. To
remove from registration by means of a post-effective amendment any of the
securities being registered hereby which remain unsold at the termination of the
offering.
74
4. For
the purposes of determining liability of the undersigned registrant under the
Securities Act of 1933 to any purchaser in the initial distribution of the
securities, the undersigned registrant undertakes that in a primary offering of
securities of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell such securities
to such purchaser:
(a) Any
preliminary Prospectus or Prospectus of the undersigned registrant relating to
the offering required to be filed pursuant to Rule 424;
(b) Any
free writing Prospectus relating to the offering prepared by or on behalf of the
undersigned registrant or used or referred to by the undersigned
registrant;
(c) The
portion of any other free writing Prospectus relating to the offering containing
material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
(d) Any
other communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
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 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 Act, and will be governed by the final adjudication
of such issue.
75
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this pre-effective amendment No. 2 to registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of San Diego, state of California, on February 8, 2010.
SPECTRASCIENCE,
INC.
|
|||
By:
|
/s/
Jim Hitchin
|
||
Name:
|
Jim
Hitchin
|
||
Title:
|
President,
Chief Executive Officer
|
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities and on the dates
indicated.
Signatures
|
Title(s)
|
Date
|
||
/s/ Jim
Hitchin
|
Chairman of the Board, President and Chief Executive Officer
|
February
8, 2010
|
||
Jim
Hitchin
|
(principal
executive officer)
|
|||
/s/ Jim
Dorst
|
Chief
Financial Officer
|
February
8, 2010
|
||
Jim
Dorst
|
(principal
financial officer and principal accounting officer)
|
|||
/s/ Mark D.
McWilliams
|
Director
|
February
8, 2010
|
||
Mark
D. McWilliams
|
||||
/s/ F. Duwaine
Townsen
|
Director
|
February
8, 2010
|
||
F.
Duwaine Townsen
|
||||
/s/ Stanley J.
Pappelbaum
|
Director
|
February
8, 2010
|
||
Stanley
J. Pappelbaum, M.D.
|
||||
/s/ Chester E. Sievert,
Jr.
|
Director
|
February
8, 2010
|
||
Chester
E. Sievert, Jr.
|
76