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EX-5.1 - SPECTRASCIENCE INC | v189160_ex5-1.htm |
EX-23.1 - SPECTRASCIENCE INC | v189160_ex23-1.htm |
Registration
No. 333-
As
filed with the U.S. Securities and Exchange Commission on June 28,
2010
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
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 Form S-1
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
|
||||||||||
Common Stock, underlying Series
C Convertible
Preferred Stock, par value $0.01 per
share
|
15,766,155 shares
|
$
|
0.28
|
(2)
|
$
|
4,414,523
|
$
|
314.76
|
||||||
Common
Stock underlying warrants held by current shareholders subject to this
offering
|
7,883,078 shares
|
$
|
0.28
|
(3)
|
$
|
2,207,262
|
$
|
157.38
|
||||||
Common
Stock underlying warrants held by selling agents subject to this
offering
|
1,576,616 shares
|
$
|
0.28
|
(3)
|
$
|
441,452
|
31.48
|
|||||||
TOTAL
|
25,225,849 shares
|
$
|
0.28
|
$
|
7,063,237
|
$
|
503.62
|
(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 June 18,
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 June 18,
2010.
|
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.
SUBJECT
TO COMPLETION, DATED JUNE 28, 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.
25,225,849
Shares of Common Stock
This
Prospectus relates to the sale of up to 25,225,849 shares of SpectraScience,
Inc. common stock, par value $0.01 per share, the (“Common Stock”), which
include:
|
·
|
15,766,155 shares of Common Stock
underlying a like number of shares of Series C Convertible Preferred
Stock;
|
|
·
|
7,883,078 shares of Common Stock
underlying Common Stock purchase warrants at an exercise price of $0.30
per share; and
|
|
·
|
1,576,616 shares of Common Stock
underlying Common Stock purchase warrants at an exercise price of $0.35
per share;
|
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 $2,916,739 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 June 18, 2010, the last reported sale price for our Common
Stock as reported on the OTC BB was $0.28 per share.
Investing
in the Common Stock involves certain risks. See “Risk Factors” beginning on page
X 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
|
12
|
|
THE
UNITS OFFERING TRANSACTION
|
12
|
|
USE
OF PROCEEDS
|
13
|
|
DESCRIPTION
OF BUSINESS
|
13
|
|
DESCRIPTION
OF PROPERTIES
|
23
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
23
|
|
MANAGEMENT
|
28
|
|
DIRECTOR
COMPENSATION
|
30
|
|
EXECUTIVE
COMPENSATION
|
31
|
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
32
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
33
|
|
LEGAL
PROCEEDINGS
|
33
|
|
DESCRIPTION
OF SECURITIES
|
33
|
|
MARKET
FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
|
35
|
|
THE
SELLING SHAREHOLDERS
|
37
|
|
PLAN
OF DISTRIBUTION
|
39
|
|
TRANSFER
AGENT
|
40
|
|
REPORTS
TO SECURITY HOLDERS
|
40
|
|
LEGAL
MATTERS
|
40
|
|
EXPERTS
|
40
|
|
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
|
40
|
|
WHERE
YOU CAN FIND MORE INFORMATION
|
40
|
|
FINANCIAL
STATEMENTS
|
41
|
|
PART
II. INFORMATION NOT REQUIRED IN PROSPECTUS
|
II-1
|
|
ITEM
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
|
II-1
|
|
ITEM
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
|
II-1
|
|
ITEM
15. RECENT SALES OF UNREGISTERED SECURITIES
|
II-2
|
|
ITEM
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
II-6
|
|
ITEM
17. UNDERTAKINGS
|
II-8
|
|
SIGNATURES
|
II-9
|
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 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,
MediSpectra, Inc., 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 25,225,849 shares of our Common Stock,
including 15,766,155 shares of Common Stock underlying a like number of Series C
Convertible Preferred Shares sold in a private placement and 9,459,694 shares
underlying warrants held by Selling Shareholders and Agents. 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 $2,917,000.
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 $4,436,812 and $5,271,332, respectively, during the past two
fiscal years of operation and an operating loss of $819,112 for the three months
ended March 31, 2010. As a result, at March 31, 2010 we had an accumulated
deficit of $19,564,788. We have incurred net losses from continuing operations
of $4,432,187 and $5,144,902 for the fiscal years ending 2009 and 2008 and net
losses from continuing operations of $820,318 in the three months ended March
31, 2010. 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 profitability 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 March
31, 2010 we had a working capital balance of $3,015,502. We had an operating
cash flow deficit of $2,463,180 and $3,811,212 for the fiscal years ended
December 31, 2009 and 2008, respectively, and an operating cash flow deficit of
$730,901 for the three month period ended March 31, 2010. From March 31, 2010
until the date of this Prospectus, the Company sold 15,766,155 shares of Series
C Convertible Preferred Stock including common stock purchase warrants to
purchase 7,883,078 shares at $0.30 per share and common stock purchase warrants
to purchase 1,576,616 shares at $0.35 per share. The Company received gross
proceeds of $3,153,231 from the sale and net proceeds of $2,699,843 after
payment of $453,388 in fees.
The
Company also has in place, but has not 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 $0.28 per share (the closing
sale price of the Common Stock on June 18, 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 $3,236,513 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 additional
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 C 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 C CONVERTIBLE PREFERRED STOCK COULD CAUSE THE PRICE OF OUR
COMMON STOCK TO DECLINE
In
connection with the conclusion of our sale of Series C Convertible Preferred
Stock, we sold a total of 15,766,155 shares of Series C 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 7,883,078 shares of Common Stock at $0.30 per share and common stock
purchase warrants to purchase an additional 1,576,616 shares of Common Stock at
$0.35 per share. All 25,225,849 shares registered for the holders in this
offering are expected to be freely tradable and can be sold so long as 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 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.
5
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 eight full-time employees, consisting of, among
others, our Chief Executive Officer, Chief Financial Officer, Director of Sales
and Marketing, Operations Manager and Chief Engineer, 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.
WE 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 OUR 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.
WE 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.
6
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 we 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
|
·
|
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
|
7
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.
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.
8
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 39% of our assets at March 31, 2010.
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.
LEGISLATIVE
ACTIONS AND POTENTIAL NEW ACCOUNTING PRONOUNCEMENTS ARE LIKELY TO IMPACT OUR
FUTURE FINANCIAL POSITION AND RESULTS OF OPERATIONS.
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.
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.
9
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 June 18,
2010, our average trading volume per day for the past three months was
approximately 138,000 shares a day with a high of 556,200 shares traded and a
low of 7,600 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 June 18, 2010, the high and low
closing prices of a share of our Common Stock were $0.36 and $0.24,
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.
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.
10
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 14% (INCLUDING ALL OPTIONS
EXERCISABLE WITHIN 60 DAYS OF JUNE 18, 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
June 18, 2010, our officers and directors beneficially own or control
approximately 14% (including all options exercisable within sixty days of June
18, 2010) of our outstanding Common Stock. These persons will have the ability
to significantly influence 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
June 18, 2010, there are outstanding Common Stock purchase options entitling the
holders to purchase 8,200,000 shares of Common Stock at a weighted average
exercise price of $0.51 per share (5,150,000 of these shares are
exercisable within 60 days of June 18, 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.
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 175,000,000 shares of Common Stock, 25,000,000
shares of Series C Convertible Preferred Stock, 2,885,000 of Series B
Convertible Preferred Stock and 22,115,000 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 June 18, 2010, we will
be entitled to issue up to 12,411,100 additional shares of Common Stock
(175,000,000 authorized less shares outstanding of 92,681,828, 18,651,155 shares
for issuance upon conversion of Series B and Series C Preferred Stock,
11,558,974 additional shares reserved for issuance to Fusion Capital, 13,902,274
shares reserved for issuance of stock options, 20,383,078 shares reserved for
issuance of Common Stock purchase warrants, 4,864,582 shares reserved for
placement agent warrants and 547,009 allocable commitment fee shares) and up to
31,348,845 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 additional securities to raise capital to further our development. It
is also likely that we will be required to issue 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.
11
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.
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) modifications 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
April 29, 2010 and June 18, 2010, the Company sold an aggregate of $3,153,231 of
units (the “Units”), each consisting of 50 shares of the Company’s $0.01 Par
Value Series C Convertible Preferred Stock (“Series C”) 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 Series
C 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 Series C at an exercise
price equal to $0.35 per share.
Holders
of the Series C 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 Series C are obligated to convert their Series C 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 Series C 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 C Preferred Stock, and (ii) any
accrued and unpaid dividends thereon.
12
Effect
of the Sale of the Series C Preferred Stock on Our Shareholders
All of
the 15,766,155 shares of Common Stock underlying the Series C, the 7,883,078
shares of Common Stock underlying the Warrants and the 1,576,616 shares of
Common Stock underlying the Agent Warrants 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 Series C, 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. As of the date of this
Prospectus, no shares of Series C have been converted into free-trading Common
Stock of the Company.
USE
OF PROCEEDS
This
Prospectus relates to shares of our Common Stock that may be offered and sold
from time to time by the Series C, 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 $2,916,739 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 is also developing an
additional application for the detection of pre-cancerous and cancerous tissue
in the esophagus, as well as to cervical cancer and pre-cancer detection through
the acquisition of Luma Imaging Corporation.
13
The
WavSTAT operates by using cool, safe ultraviolet laser light to optically
illuminate and analyze tissue, assisting 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
transmitting 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 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 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, bladder and pancreatic cancer detection. The Company is
currently developing additional applications for these markets.
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
|
·
|
The five-year survival rate for
those patients in whom the cancer has spread further to the liver or other
organs is only 10%.
|
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 much as 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 decreases 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.
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 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;
|
14
|
·
|
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 above, 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 initial 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 the WavSTAT appears to be
effective in detecting pre-cancerous and cancerous tissue. Derived from the
study data, a proprietary tissue recognition software algorithm was developed
and is being refined in clinical trials.
We
estimate the annual potential revenue estimated for esophageal cancer and
pre-cancer detection in the United States and Europe to be in the range of $850
million with the related annual disposable/re-useable market estimated at an
additional $250-650 million.
15
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
approximately 33% of high-grade precancerous lesions in women referred with
questionable PAP results. Our LUMA Cervical Imaging System’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
|
·
|
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 Systems 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.
16
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 FDA approved the
supplement for the WavSTAT II 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.
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 are continuing 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.
17
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 2010, 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 continued to invest significant capital in research and development
activities for the fiscal year ended December 31, 2009. Research and development
expenses were $2,126,574 and $2,220,007 for the fiscal years ended December 31,
2009 and 2008, respectively. For the three months ended March 31, 2010, research
and development expenses were $224,392.
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,
2009, the three-month period ending March 31, 2010 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 2010,
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 marketing 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 Systems, will be a strong
component of product introduction strategy. To further international objectives
during 2010, 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.
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.
18
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.
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.
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.
Manufacturing
and Sources of Supply
SpectraScience
manufactures the WavSTAT and LUMA Systems at its facility in San Diego. The
manufacturing of the WavSTAT forceps are outsourced to United States contract
OEM manufacturers. 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
19
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 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.
Many
competitors have substantially greater resources than we do, either internally
or in combination with strategic partners. These resources may allow them to
develop, market and distribute technologies or products that could be more
effective than those developed or marketed by us, or that would render our
technologies and products obsolete. The resource advantages they may have
are:
|
·
|
greater capital
resources;
|
|
·
|
greater 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.
|
20
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
|
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 34 issued U.S. patents and
international patents for the LUMA technology.
Patent Name
|
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.
21
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;
|
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.
22
Employees
As of
June 18, 2010, SpectraScience had eight full-time employees, five 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.
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.
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 12 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 international markets for the detection of esophageal
cancer and pre-cancer;
|
|
·
|
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.
|
23
Cash
Requirements
We expect
to incur additional operating losses through 2011, as we complete clinical
trials, continue with 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.
We have
financed our capital requirements principally through the private sale of equity
securities. We had cash and cash equivalents of approximately $3,408,000 at
December 31, 2009 and $1,618,000 at December 31, 2008. The approximate
$1,790,000 increase in cash for the fiscal year was a result of net cash
proceeds of approximately $4,308,000 from the sale of Series B Convertible
Preferred Stock and $60,000 from the exercise of stock options offset by
approximately $2,463,000 of cash used in operations and approximately $115,000
related to acquisitions of equipment. At March 31, 2010, we had cash and cash
equivalent balances of approximately $2,677,000. We believe that we have
sufficient working capital for planned operations for the next twelve
months.
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;
|
|
·
|
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 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.
As of
June 18, 2010 we had not sold Fusion Capital any shares of stock under the
common stock purchase agreement.
24
Results
of Operations
The
following discussion should be read in conjunction with the consolidated
Financial Statements and Notes thereto appearing elsewhere in this
report.
Three
Months Ended March 31, 2010 as Compared to the Three Months Ended March 31,
2009
The
Company recognized revenue of approximately $11,000 and $49,000 for the three
months ended March 31, 2010 and 2009, respectively.
Overall
research and development expenses for the three months ended March 31, 2010 and
2009 were approximately $224,000 and $466,000, respectively. The approximate
$242,000 decrease in research and development expenses is related to approximate
decreases in obsolete inventory expense of $100,000, decreases in stock
compensation expense of $77,000, decreases in payroll expense of $41,000,
decreases in production supplies expense of $8,000 and decreases in all other
expenses of approximately $16,000. The majority of these decreases resulted from
management’s overall efforts to reduce cash expenditures in the face of the
economic recession, beginning approximately one year ago.
General
and administrative expenses for the three months ended March 31, 2010 and 2009
were approximately $511,000 and $465,000, respectively. The approximate $46,000
increase for the three months ended March 31, 2010 compared to the three months
ended March 31, 2009 was due to approximate increases in amortization expense of
$51,000, investor relations expense of $36,000, accounting expenses of $33,000
and payroll expenses of $33,000 offset by approximate decreases of $90,000 of
stock compensation expense, and decreases of $17,000 in all other expenses. The
increase in amortization was a result of additional non-cash amortization
related to a financing facility. The increase in non-cash investor relations
expense is due to the Company contracting with an investor relations firm. The
increase in accounting costs reflects the cost to the Company of filing a
registration statement in the most recent quarter and the increase in payroll is
a result of increased salaries as compared to the prior period one year ago. The
decreases in expenses were a result of headcount and discretionary expense
reductions a result of the downturn in the overall economy. Of the total expense
of $511,000, approximately $49,000 was a result of non-cash stock option
expense.
Sales and
marketing expenses for the three months ended March 31, 2010 and 2009 were
approximately $92,000 and $187,000, respectively. This decrease of approximately
$95,000 was primarily due to approximate decreases of $78,000 in payroll expense
and $23,000 in stock compensation expense offset by an approximate increase of
$6,000 in all other expenses. The decrease in overall expense was a result of
headcount and discretionary expense reductions a consequence of management’s
response to the downturn in the economy. Of the total expense of $92,000,
approximately $4,000 was a result of non-cash stock option expense.
As a
result of the above, the approximate net loss for the three months ended March
31, 2010 and 2009 was $820,000 and $1,087,000, 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 quarter ended March 31, 2010, approximately
$50,000 was comprised of non-cash stock-option expense.
Liquidity
and Capital Resources
Historically,
the Company’s sources of cash have included the issuance and sales of equity
securities and interest income. The Company’s historical cash outflows have been
primarily associated with cash used for operating activities including research
and development, administrative and sales activities. Fluctuations in the
Company’s working capital due to timing differences of our cash receipts and
cash disbursements also impact our cash flow. For the three-month period ending
March 31, 2010, the Company used $730,901 in cash to fund operating activities.
As of March 31, 2010, the Company had working capital of $3,015,502 and a cash
balance of $2,677,336.
The
Company expects to incur significant additional operating losses through at
least December 31, 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, 2009 as Compared to Fiscal Year Ended December 31,
2008
Revenue
The Company
recognized approximate revenue of $167,000 for the fiscal year ending December
31, 2009 as compared to approximate revenue of $61,000 for the fiscal year
ending December 31, 2008. The increase is a result of the sale of a greater
number of WavSTAT Optical Biopsy Systems in fiscal 2009 as compared to fiscal
2008.
25
Cost
of Revenue
Cost of
goods increased from approximately $27,000 for the fiscal year ending December
31, 2008 to approximately $111,000 for the fiscal year ending December 31, 2009.
The increase of $84,000 is a result of the sale of a greater number of WavSTAT
Optical Biopsy Systems in the most recent fiscal year.
Operating
Expenses
Consolidated
operating expenses were approximately $4,493,000 (of which approximately
$696,000 was for non-cash compensation from stock options) for the fiscal
year ended December 31, 2009, as compared to approximately $5,305,000 (of which
approximately $992,000 was for non-cash compensation from stock options)
for the comparable period one year ago. The net decrease of $812,000 was
comprised of an approximate $93,000 decrease in research and development
expenses, a $274,000 decrease in general and administrative expenses and a
$445,000 decrease in sales and marketing expenses. The overall decreases were a
result of the Company’s efforts to reduce expenses in response to the downturn
in the overall economy.
Research
and development expenses decreased by approximately $93,000 due to an decrease
of approximately $446,000 in payroll expense, a $171,000 decrease in stock
option compensation expense, a $152,000 decrease in product development expense,
an $81,000 decrease in clinical trial expense, a $40,000 decrease in research
consulting expense, a $33,000 decrease in production supplies expense, a $14,000
decrease in software expense, a $7,000 decrease in design expense and a $10,000
decrease in all other research and development expenses, offset by an
approximate $761,000 non-cash increase in LUMA asset impairment expense and an
approximate $100,000 increase in inventory obsolescence associated with WavSTAT
inventory. All of the decreases were a result of the Company’s aggressive cost
reduction efforts in response to the recessionary economy. The increase in asset
impairment and inventory obsolescence expense is primarily the result of
management’s analysis of the reduction in the fair value of those
assets.
General
and administrative expenses decreased approximately $274,000 due to an
approximate $104,000 decrease in administrative payroll expense, a $67,000
decrease in recruiting expense, a $67,000 decrease in travel expenses, a $64,000
decrease in audit related expense, a $63,000 decrease in consulting expense, a
$23,000 decrease in stock compensation expense, a $15,000 decrease in internet
expense, a $12,000 decrease in advertising expense, a $4,000 decrease in legal
expense, offset by an approximate $141,000 non-cash increase in amortization
expense and a $4,000 increase in all other expenses. The decreases in the
majority of expense categories are a result of the Company’s aggressive cost
reduction efforts in response to the recessionary economy. The increase in
amortization expense is primarily a result of the amortization of a prepaid
non-cash commitment fee related to securing a financing facility in January of
2009.
Sales and
marketing expenses decreased by approximately $445,000 as compared to the prior
fiscal year. The decrease was comprised of approximately $216,000 in sales
payroll expense, a $103,000 decrease in stock compensation expense, a $37,000
decrease in consulting expense, a $37,000 decrease in trade show expense, a
$21,000 decrease in advertising expense, a $21,000 decrease in convention
expense and a $10,000 decrease in all other sales expenses. The decreases in all
expense categories are a result of the Company’s aggressive cost reduction
efforts implemented as a result of the recessionary economy.
Other
Income
Other
income, net decreased approximately $121,000 due to relatively lower interest
earnings on lower average cash balances for the year as compared to the prior
fiscal year.
Liquidity
and Capital Resources
On
December 31, 2009, the Company had a cash balance of $3,408,237 as compared with
a cash balance of $1,618,181 at December 31, 2008, representing an increase of
$1,790,056 in cash for the period. The cash balances increased primarily due to
sales of Series B Convertible Preferred Stock offset by working capital used in
operations. Historically, we have incurred minimal capital equipment
expenditures and no large capital outlays are foreseen. We believe that the
Company has sufficient working capital for planned operations for the next
twelve months.
From May
through December 31, 2009, as a part of a Units offering, the Company sold
25,000,000 shares of Series B Preferred Stock to accredited investors for an
aggregate consideration of $5,000,000. The Company received net cash proceeds of
$4,308,446 after the payment of finders’ fees and expenses of
$691,554.
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. As of March
26, 2010, 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.
26
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. Note that our preparation of this Report on Form 10-K requires us to
make estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our
consolidated financial statements, and the reported amount of revenue, if any,
and expenses during the reporting period. There can be no assurance that actual
results will not differ from those estimates.
Revenue
Recognition
In
accordance with Revenue
Recognition accounting guidance, we recognize revenues when persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered, the price is fixed or determinable and collectability is reasonably
assured. Revenue from the sale of our products is generally recognized when
title and risk of loss transfers to the customer, the terms of which are
generally free on board shipping point. We use customer purchase orders to
determine the existence of an arrangement. We use shipping documents and
third-party proof of delivery to verify that title has transferred. We assess
whether the fee is fixed or determinable based upon the terms of the agreement
associated with the transaction. To determine whether collection is probable, we
assess a number of factors, including past transaction history with the customer
and the creditworthiness of the customer.
Accounting
For Transactions Involving Stock Compensation
We
account for stock-based compensation under the provisions of FASB ASC Topic 718,
Compensation—Stock
Compensation, or ASC 718, which requires the measurement and recognition
of compensation expense for all stock-based awards made to employees and
directors based on estimated fair values on the grant date. We adopted ASC 718
on January 1, 2006 using the modified prospective method. We estimate the
fair value of stock-based awards on the date of grant using the
Black-Scholes-Merton option pricing model, or Black-Scholes model. These
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 approximately $696,000 and
$992,000 for the years ended December 31, 2009 and 2008,
respectively.
Inventory
Valuation
We state
our inventories at the lower of cost or market value, determined on a specific
cost basis. We provide inventory allowances when conditions indicate that the
selling price could be less than cost due to obsolescence and reductions in
estimated future demand. We balance the need to maintain strategic inventory
levels with the risk of obsolescence due to changing technology and customer
demand levels. Unfavorable changes in market conditions may result in a need for
additional inventory reserves that could adversely impact our gross margins.
Conversely, favorable changes in demand could result in higher gross margins
when we sell products.
Valuation
of Long-lived Assets
Our
long-lived assets consist of property and equipment and intangible assets.
Equipment is carried at cost and is depreciated over the estimated useful lives
of the assets, which are generally two to three years, and leasehold
improvements are amortized over the lesser of the lease term or the estimated
useful lives of the improvements. The straight-line method is used for
depreciation and amortization. Equipment related to our LUMA Systems is not
currently being depreciated but is reviewed for impairment at the end of each
reporting period. Intangible assets consist of patents and trademarks, which are
amortized using the straight-line method over the estimated useful lives of the
assets. We do not capitalize external legal costs and filing fees associated
with obtaining patents on our new discoveries. Acquired intellectual property is
recorded at cost and is amortized over its estimated useful life. We believe the
useful lives we assigned to these assets are reasonable. The Company assesses
the recoverability of long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. These computations utilize judgments and assumptions inherent in
management’s estimate of future cash flows to determine recoverability of these
assets. If management’s assumptions about these assets were to change as a
result of events or circumstances, the Company may be required to record an
impairment loss. With respect to the Company’s long-lived assets, the Company
recorded impairment charges of approximately $761,000 and $0 for the years ended
December 31, 2009 and 2008.
27
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 will
become the source of authoritative U.S. generally accepted accounting principles
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the 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 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 Chief Executive Officer
|
67
|
2004
|
||
Jim
Dorst, Chief Financial
Officer
|
55
|
2007
|
||
Mark
McWilliams, Director
|
53
|
2004
|
||
Sheldon
L. Miller, Director
|
74
|
2010
|
||
Stanley
Pappelbaum, M.D., Director
|
72
|
2006
|
||
Chester
E. Sievert, Director
|
58
|
2004
|
||
F.
Duwaine Thompson, Director
|
76
|
2009
|
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
brings his extensive experience in all phases of manufacturing and company
operations, in particular, sales and marketing of medical devices, to the Board
of Directors. 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.
28
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. Mr. McWilliams brings his
expertise in managing and growing small technology companies and his strong
network of contacts within the medical devices industry, to the Board of
Directors. He earned his
MSME from the Massachusetts Institute of Technology, his BSME from Northeastern
University and holds eight utility patents.
Sheldon L.
Miller, Director. Sheldon L. Miller has been a litigator and expert
counsel for more than forty years and in private practice for more than 30
years. He has operated the Law Office of Sheldon Miller, PC for the past 30
years. Mr. Miller was a member of the Board of Governors of the American Trial
Lawyers Association from 1977 through 2009 (longest tenure in history). From
1979 through 1992 he was the President of the Mediation Tribunal Association in
Wayne County (Detroit), Michigan. In 1971 he pioneered the concept of mediation
and was the first mediator on behalf of the Plaintiff’s Bar in the State of
Michigan. Mr. Miller was also the first to prosecute and articulate the concept
of “comparative negligence” in the State of Michigan. Mr. Miller graduated from
Wayne State University Law School in Detroit in 1961. Mr. Miller brings his
considerable experience in legal risk analysis and responsibility to the Board
of Directors.
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). Dr. Pappelbaum brings his
intimate knowledge of the healthcare industry and familiarity with recent
changes in the healthcare environment, to the Board of Directors.
Chester E.
Sievert, Jr., Director. Mr. Sievert is the Director of Regulatory and
Clinical Affairs at Electromed, Inc., a pulmonary assist medical device
manufacturer . Between January 2003 and March 2010 he was President of Advanced
Photodynamic Technologies. 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. Mr. Sievert brings his significant experience in the
application of light based and fluorescence technologies in the medical field to
the Board of Directors, as well as his significant management experience and
legacy understanding of the Company.
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. Mr. Towsen brings his specific
public accounting environment and public markets experience to the Board of
Directors, as well as his deep expertise related to corporate governance and
fiduciary responsibility issues.
29
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 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. On
November 7, 2008 directors McWilliams, 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 $0.27 per share
on July 20, 2009. The exercise prices of the options were based on the
prevailing market price (defined as the closing price) of the Common Stock on
the date of grant.
The
options granted to employee and non-employee directors under the Amended 2001
Stock Option Plan expire ten years from the date of grant (subject to earlier
termination in the event of death or termination), are not transferable (except
by will or the laws of descent and distribution), and become exercisable in
three equal annual installments commencing on the date of grant except for the
November 7, 2008 and July 20, 2009 grants which commence vesting in three equal
annual amounts one year from the date of grant.
The
following table shows the compensation earned by each of our non-employee
directors as of the year ended December 31, 2009:
Name
|
Option Awards
($) (3)
|
Total
|
||||||
F.
Duwaine Townsen (1)(2)
|
$
|
91,120
|
(2)
|
$
|
91,120
|
|
(1)
|
The
aggregate number of stock awards and options awards issued and outstanding
as of December 31, 2009 are 0 and
400,000.
|
|
(2)
|
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 $91,120 represents
the fair value of the stock option as determined on the date of
grant.
|
|
(3)
|
The
value of each option award is the grant date fair value as determined
under FASB ASC Topic 718, Compensation – Stock
Compensation, or ASC
718.
|
30
EXECUTIVE
COMPENSATION
Summary
Compensation Table.
Name and Principal Position
|
Year
|
Salary
($)
|
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
|
$
|
160,101
|
|||||
2008
|
$
|
152,885
|
152,885
|
|
(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. Mr. Hitchin
received no stock option grants or other equity or non-equity compensation
in 2009 or 2008 that is not reflected in the table
above.
|
|
(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. Mr. Dorst received no stock option grants or other
equity or non-equity compensation in 2009 or 2008 that is not reflected in
the table above.
|
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
Dorst
|
400,000
|
-
|
-
|
$
|
0.90
|
09/07/17
|
31
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information, as of June 18, 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 June, 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 92,681,828 shares of Common Stock outstanding as of June 18,
2010, plus for each individual, any securities that individual has the right to
acquire within 60 days of June 18, 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.
Beneficial Owner
|
|
Amount and Nature
of Beneficial
Ownership (1)
|
Percent
of
Class
|
|||||
EuclidSR
Partners, LP (4)
|
8,776,371
|
9
|
%
|
|||||
Jim
Hitchin (2)
(3)
|
8,643,149
|
9
|
%
|
|||||
Sheldon
L. Miller (3)
(7)
(8)
|
3,016,155
|
3
|
%
|
|||||
Mark
McWilliams (3)
(6)
|
741,666
|
*
|
||||||
Chester
E. Sievert (3)
(5)
|
633,333
|
*
|
||||||
Stanley
Pappelbaum M.D. (3)
(6)
|
583,000
|
*
|
||||||
Jim
Dorst (2)
(7)
|
400,000
|
*
|
||||||
F.
Duwaine Townsen (3)
(9)
|
133,333
|
*
|
||||||
Directors
and executive officers, as a group (seven persons)(10)
|
14,150,636
|
14
|
%
|
*
|
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 report.
|
|
(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 report.
|
|
(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 report.
|
|
(8)
|
Includes
1,970,000 shares of Series C Convertible Preferred Stock held by Sheldon
L. Miller and 1,046,155 shares of Series C Convertible Preferred Stock
held by SM Company, LLC., an entity affiliated by common control with Mr.
Miller. All 3,016,155 shares of Series C Convertible Preferred Stock are
convertible into a like number of shares of Common Stock of
SpectraScience, Inc.
|
|
(9)
|
Includes
133,333 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 report.
|
|
(10)
|
Includes
2,433,332 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 report.
|
32
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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 175,000,000 shares of Common Stock, par value
$0.01 per share, 22,115,000 of undesignated shares of capital stock
(“Undesignated Shares”), 2,885,000 shares of Series B Convertible Preferred
Stock and 25,000,000 shares of Series C Convertible Preferred Stock. As of June
18, 2010 there were issued and outstanding 92,681,828 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 25,000,000 shares of Series B
Convertible Preferred Stock (“Series B”) inclusive of an 8% cumulative dividend
payable on December 31 of each year. As of the date of this report, 22,115,000
shares of the Series B have been converted into previously registered Common
Stock and the remaining 2,885,000 shares are the process of being converted into
Common Stock. The Series B 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.
From
March 31, 2010 until the date of this Prospectus, the Company sold 15,766,155
shares of Series C Convertible Preferred Stock (“Series C”). The terms of the
Series C are the same as the Series B, except that the Series C carries no
dividend payable. The following descriptive paragraphs are applicable to both
the Series B and Series C (the “Preferred Stock”).
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. The “Liquidation
Preference Amount” is 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:
33
|
·
|
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.
|
Stock Options and Warrants
Convertible into Common Stock
As of
June 18, 2010, there were outstanding stock options entitling the holders to
purchase 8,200,000 shares of Common Stock at a weighted average exercise price
of $0.51 per share and warrants entitling the holders to purchase up to
25,247,660 shares of Common Stock at a weighted average exercise price of $0.32
per share. As of June 18, 2010 the Company has an additional 5,702,274 option
shares available for grant. Warrants to purchase 9,459,694 shares of Common
Stock, subject to registration under this Prospectus, were issued from March
through June of 2010, have five-year lives, an average exercise price of $0.31
and a cashless exercise provision.
34
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 June 18, 2010 was $0.28.
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
|
||||||
2010:
|
||||||||
First
Quarter
|
$ | 0.47 | $ | 0.29 | ||||
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 June
18, 2010 we had approximately 800 registered shareholders of record of the
92,147,615 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 Series B 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.
35
The
following table sets forth as of June 18, 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
|
8,200,000 | $ | 0.51 | 5,702,274 | ||||||||
Equity
compensation plans not approved by security holders
|
- | - | - | |||||||||
Totals
|
8,200,000 | $ | 0.51 | 5,702,274 |
(1) Net
of equity instruments forfeited, exercised or expired.
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 13,902,271 at June 18, 2010. At June
18, 2010, we had had option grants outstanding for 8,200,000 common shares under
the Option Plan, with 5,702,274 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.
36
THE
SELLING SHAREHOLDERS
The
following table presents information regarding the Selling
Shareholders. Neither the Selling Shareholders nor any of their
affiliates, except for Sheldon L. Miller, a director of the Company, and Mr.
Miller’s affiliated entity SM Company, LLC, 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
|
|||||||
Aquatong
Investments, LP (2)
|
375,000
|
*
|
% |
375,000
|
*
|
||||||
Back
Nine LLC (3)
|
375,000
|
*
|
375,000
|
*
|
|||||||
William
Barkow (4)
|
428,871
|
*
|
428,871
|
*
|
|||||||
John
Bivona (5)
|
92,538
|
*
|
92,538
|
*
|
|||||||
Peter
Nigel Blackadder (6)
|
187,500
|
*
|
187500
|
*
|
|||||||
Christine
Caridi (7)
|
20,000
|
*
|
20,000
|
*
|
|||||||
Carl
Carlsson (8)
|
150,000
|
*
|
150,000
|
*
|
|||||||
Adolfo
and Donna Carmona JT TEN (9)
|
750,000
|
*
|
750,000
|
*
|
|||||||
Kevin
Carnahan (10)
|
750,000
|
*
|
750,000
|
*
|
|||||||
Richard
P. Clark (11)
|
750,000
|
*
|
750,000
|
*
|
|||||||
Suzanne
Cohn (12)
|
10,000
|
*
|
10,000
|
*
|
|||||||
Joseph
Dempsey (13)
|
10,000
|
*
|
10,000
|
*
|
|||||||
Susan
Diamond (14)
|
10,000
|
*
|
10,000
|
*
|
|||||||
Emilio
Disanluciano (15)
|
247,371
|
*
|
247,371
|
*
|
|||||||
Ali
Muhammed Ali Faramawy (16)
|
825,000
|
1
|
825,000
|
*
|
|||||||
Golden
Opportunity Consulting LLC (17)
|
562,500
|
*
|
562,500
|
*
|
|||||||
Hoffman
Revocable Trust (18)
|
375,000
|
*
|
375,000
|
*
|
|||||||
John
Igoe (19)
|
60,000
|
*
|
60,000
|
*
|
|||||||
Pradeep
Kaul (20)
|
375,000
|
*
|
375,000
|
*
|
|||||||
Kenneth
Lacey (21)
|
750,000
|
1
|
750,000
|
*
|
|||||||
Maarten
Linthorst (22)
|
1,650,000
|
2
|
1,650,000
|
1
|
|||||||
Eric
and Lisa Loe JT TEN (23)
|
375,000
|
*
|
375,000
|
*
|
|||||||
KTI
Investment Foundation (24)
|
225,000
|
*
|
225,000
|
*
|
|||||||
Emilio
Maitin (25)
|
150,000
|
*
|
150,000
|
*
|
|||||||
Daniel
Mattes (26)
|
750,000
|
1
|
750,000
|
*
|
|||||||
Frank
Mazzola (27)
|
738,336
|
1
|
738,336
|
*
|
|||||||
Jeffrey
G. Mehallick (28)
|
750,000
|
1
|
750,000
|
*
|
|||||||
Sheldon
L. Miller (29)
|
2,955,000
|
3
|
2,955,000
|
2
|
|||||||
Peter
Nordin APS (30)
|
187,500
|
*
|
187,500
|
*
|
|||||||
Gerald
Reece (31)
|
112,500
|
*
|
112,500
|
*
|
|||||||
Regent
Capital Trust Corporation Ltd. As Trustee of the Briar Services Employee
Incentive Trust (32)
|
750,000
|
1
|
750,000
|
*
|
|||||||
Jan-Age
Ronnestad (33)
|
1,050,000
|
1
|
1,050,000
|
1
|
|||||||
Spectra
Investors II, LLC (34)
|
3,000,000
|
3
|
3,000,000
|
2
|
|||||||
Mario
Sceusa (35)
|
10,000
|
*
|
10,000
|
*
|
|||||||
SM
Company, LLC (36)
|
1,569,233
|
1
|
1,569,233
|
1
|
|||||||
Dale
W. Sobeck (37)
|
562,500
|
*
|
562,500
|
*
|
|||||||
Steven
Soler (38)
|
9,500
|
*
|
9,500
|
*
|
|||||||
James
Spallino (39)
|
187,500
|
*
|
187,500
|
*
|
|||||||
Spectra
Investors, LLC (40)
|
1,725,000
|
2
|
1,725,000
|
1
|
|||||||
Guy
Spelman (41)
|
112,500
|
*
|
112,500
|
*
|
|||||||
Paul
Stamatis, Jr. (42)
|
225,000
|
*
|
225,000
|
*
|
|||||||
Lennart
Ulvskog (43)
|
660,000
|
*
|
660,000
|
*
|
|||||||
Alberto
Rittatore Vonwiller (44)
|
367,500
|
*
|
367,500
|
*
|
|||||||
Total
|
25,225,849
|
27
|
% |
25,225,849
|
21
|
%
|
37
(1)
|
Applicable
percentage of ownership is based on 117,907,676 shares of our Common Stock
outstanding as of June 18, 2010, together with securities exercisable or
convertible into shares of Common Stock within sixty (60) days of June 18,
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
250,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 125,000 shares of Common Stock underlying common
stock warrants.
|
(3)
|
Includes
250,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 125,000 shares of Common Stock underlying common
stock warrants.
|
(4)
|
Includes
428,871 shares of Common Stock underlying Agent
Warrants.
|
(5)
|
Includes
92,538 shares of Common Stock underlying Agent
Warrants.
|
(6)
|
Includes
125,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 62,500 shares of Common Stock underlying common
stock warrants.
|
(7)
|
Includes
20,000 shares of Common Stock underlying Agent
Warrants.
|
(8)
|
Includes
100,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 50,000 shares of Common Stock underlying common
stock warrants.
|
(9)
|
Includes
500,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 250,000 shares of Common Stock underlying common
stock warrants.
|
(10)
|
Includes
500,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 250,000 shares of Common Stock underlying common
stock warrants.
|
(11)
|
Includes
500,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 250,000 shares of Common Stock underlying common
stock warrants.
|
(12)
|
Includes
10,000 shares of Common Stock underlying Agent
Warrants.
|
(13)
|
Includes
10,000 shares of Common Stock underlying Agent
Warrants.
|
(14)
|
Includes
10,000 shares of Common Stock underlying Agent
Warrants.
|
(15)
|
Includes
247,371 shares of Common Stock underlying Agent
Warrants.
|
(16)
|
Includes
550,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 275,000 shares of Common Stock underlying common
stock warrants.
|
(17)
|
Includes
375,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 187,500 shares of Common Stock underlying common
stock warrants.
|
(18)
|
Includes
250,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 125,000 shares of Common Stock underlying common
stock warrants.
|
(19)
|
Includes
40,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 20,000 shares of Common Stock underlying common
stock warrants.
|
(20)
|
Includes
250,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 125,000 shares of Common Stock underlying common
stock warrants.
|
(21)
|
Includes
500,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 250,000 shares of Common Stock underlying common
stock warrants.
|
(22)
|
Includes
1,100,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 550,000 shares of Common Stock underlying common
stock warrants.
|
(23)
|
Includes
250,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 125,000 shares of Common Stock underlying common
stock warrants.
|
(24)
|
Includes
150,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 75,000 shares of Common Stock underlying common
stock warrants.
|
(25)
|
Includes
100,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 50,000 shares of Common Stock underlying common
stock warrants.
|
(26)
|
Includes
500,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 250,000 shares of Common Stock underlying common
stock warrants.
|
(27)
|
Includes
738,336 shares of Common Stock underlying Agent
Warrants.
|
(28)
|
Includes
500,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 250,000 shares of Common Stock underlying common
stock warrants.
|
(29)
|
Includes
1,970,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 985,000 shares of Common Stock underlying common
stock warrants.
|
(30)
|
Includes
125,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 62,500 shares of Common Stock underlying common
stock warrants.
|
(31)
|
Includes
75,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 37,500 shares of Common Stock underlying common
stock warrants.
|
38
(32)
|
Includes
500,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 250,000 shares of Common Stock underlying common
stock warrants.
|
(33)
|
Includes
700,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 350,000 shares of Common Stock underlying common
stock warrants.
|
(34)
|
Includes
2,000,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 1,000,000 shares of Common Stock underlying common
stock warrants.
|
(35)
|
Includes
10,000 shares of Common Stock underlying Agent
Warrants.
|
(36)
|
Includes
1,046,155 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 523,078 shares of Common Stock underlying common
stock warrants.
|
(37)
|
Includes
375,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 187,500 shares of Common Stock underlying common
stock warrants.
|
(38)
|
Includes
9,500 shares of Common Stock underlying Agent
Warrants.
|
(39)
|
Includes
125,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 62,500 shares of Common Stock underlying common
stock warrants.
|
(40)
|
Includes
1,150,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 575,000 shares of Common Stock underlying common
stock warrants.
|
(41)
|
Includes
75,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 37,500 shares of Common Stock underlying common
stock warrants.
|
(42)
|
Includes
150,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 75,000 shares of Common Stock underlying common
stock warrants.
|
(43)
|
Includes
440,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 220,000 shares of Common Stock underlying common
stock warrants.
|
(44)
|
Includes
245,000 shares of Common Stock underlying Series C Convertible Preferred
Stock shares owned and 122,500 shares of Common Stock underlying common
stock warrants.
|
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 (such as the
OTCBB);
|
|
-
|
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.
39
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, from the SEC, as mentioned above, or by contacting the Company at 11568
Sorrento Valley Road, Suite 11, San Diego, California 92121 or by telephone at
(858) 847-200.
LEGAL
MATTERS
The
validity of the shares offered hereby was passed upon for the Company by
Fredrikson & Byron P.A., 200 South Sixth Street, Suite 4000 Minneapolis, MN
55402.
EXPERTS
Our
consolidated financial statements as of December 31, 2009 and 2008 and for the
years then ended 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.
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. You may
also obtain a copy of our annual report, or any other of our other public filing
by contacting the Company at 11568 Sorrento Valley Road, Suite 11, San Diego,
California 92121 or by telephone at (858) 847-0200.
40
Page
|
|
Fiscal
Years Ended December 31, 2009 and 2008
|
|
Report
of Independent Registered Public Accounting Firm
|
42
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
43
|
Consolidated
Statements of Operations for the years ended December 31, 2009 and
2008
|
44
|
Consolidated
Statements of Stockholders’ Equity from December 31, 2007 to December 31,
2009
|
45
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009 and
2008
|
46
|
Notes
to Consolidated Financial Statements
|
47
|
Quarter
Ended March 31, 2010 (Unaudited)
|
|
Consolidated
Balance Sheets
|
57
|
Consolidated
Statements of Operations
|
58
|
Consolidated
Statements of Stockholders’ Equity
|
59
|
Consolidated
Statements of Cash Flows
|
60
|
Notes
to Consolidated Financial Statements
|
61
|
41
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 sheets of SpectraScience,
Inc. and subsidiary as of December 31, 2009 and 2008 and the related
consolidated statements of operations, shareholders’ equity, and cash flows for
the years 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 audits 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 audits provide 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, 2009 and 2008, and the results of their
operations and their cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles.
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, 2009, included in Item 9(A)(T) of Form 10-K and, accordingly, we do not
express an opinion thereon.
/s/
McGladrey & Pullen
Des
Moines, Iowa
March 31,
2010
42
SpectraScience,
Inc. and Subsidiary
Consolidated
Balance Sheets
December
31, 2009 and 2008
December 31,
2009
|
December 31,
2008
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$
|
3,408,237
|
$
|
1,618,181
|
||||
Accounts
receivable
|
40,271
|
23,877
|
||||||
Inventories
|
405,675
|
465,881
|
||||||
Prepaid
expenses and other current assets
|
195,568
|
85,344
|
||||||
Total
current assets
|
4,049,751
|
2,193,283
|
||||||
Fixed
assets, net
|
1,139,839
|
1,876,738
|
||||||
Patents,
net
|
2,915,984
|
3,165,550
|
||||||
TOTAL
ASSETS
|
$
|
8,105,574
|
$
|
7,235,571
|
||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$
|
219,783
|
$
|
345,762
|
||||
Accrued
expenses
|
167,475
|
88,081
|
||||||
Total
liabilities
|
387,258
|
433,843
|
||||||
COMMITMENTS
|
||||||||
SHAREHOLDERS’
EQUITY
|
||||||||
Series
B Convertible Preferred Stock, $.01 par value:
|
||||||||
Authorized
– 25,000,000; Shares issued and outstanding – 25,000,000 shares at
December 31, 2009 (no shares at December 31, 2008), $5,000,000 liquidation
value plus accumulated and unpaid dividends of $99,685 as of December 31,
2009
|
250,000
|
—
|
||||||
Common
stock, $.01 par value:
|
||||||||
Authorized
— 160,000,000 shares
|
||||||||
Issued
and outstanding—70,142,615 and 68,613,598 shares at December 31, 2009 and
2008, respectively
|
701,426
|
686,136
|
||||||
Additional
paid-in capital
|
25,511,360
|
17,835,865
|
||||||
Accumulated
deficit
|
(18,744,470
|
)
|
(11,720,273
|
)
|
||||
TOTAL
SHAREHOLDERS’ EQUITY
|
7,718,316
|
6,801,728
|
||||||
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
8,105,574
|
$
|
7,235,571
|
See
accompanying notes to the consolidated financial statements
43
SpectraScience,
Inc. and Subsidiary
Consolidated
Statements of Operations
For the
Years Ended December 31, 2009 and 2008
Year Ended
December 31,
|
||||||||
2009
|
2008
|
|||||||
Revenue
|
$
|
167,123
|
$
|
60,560
|
||||
Cost
of revenue
|
110,572
|
27,130
|
||||||
Gross
profit
|
56,551
|
33,430
|
||||||
Operating
expenses:
|
||||||||
Research
and development
|
2,126,574
|
2,220,007
|
||||||
General
and administrative
|
2,007,380
|
2,280,867
|
||||||
Sales
and marketing
|
359,409
|
803,888
|
||||||
Total
operating expenses
|
4,493,363
|
5,304,762
|
||||||
Operating
loss
|
(4,436,812
|
)
|
(5,271,332
|
)
|
||||
Other
income, net
|
4,625
|
126,430
|
||||||
Net
loss
|
(4,432,187
|
)
|
(5,144,902
|
)
|
||||
Deemed
dividend on preferred stock
|
(2,592,010
|
)
|
—
|
|||||
Accumulated
but unpaid dividend on preferred stock
|
(99,685
|
)
|
—
|
|||||
Net
loss applicable to common shareholders
|
$
|
(7,123,882
|
)
|
$
|
(5,144,902
|
)
|
||
Basic
and diluted net loss per share
|
$
|
(0.10
|
)
|
$
|
(0.08
|
)
|
||
Weighted
average common shares outstanding
|
69,780,156
|
66,344,469
|
See
accompanying notes to the consolidated financial statements
44
SpectraScience,
Inc. and Subsidiary
Consolidated
Statements of Shareholders’ Equity
For the
Year’s Ended December 31, 2009 and 2008
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
Paid-In
|
|
|
Accumulated
|
|
|
Total
Shareholders’
|
|||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
||||||||||||||||||||||
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
|
|||||||||||||||
Stock
based compensation – consultants
|
133,402
|
133,402
|
||||||||||||||||||||||||||
Stock
based compensation – employees
|
562,222
|
562,222
|
||||||||||||||||||||||||||
Stock
options exercised
|
400,000
|
4,000
|
56,000
|
60,000
|
||||||||||||||||||||||||
Common
Stock issued for services
|
1,129,017
|
11,290
|
273,415
|
284,705
|
||||||||||||||||||||||||
Sale
of Series B Preferred Stock at $0.20 per share
|
25,000,000
|
4,308,446
|
4,308,446
|
|||||||||||||||||||||||||
Deemed
Dividend – Preferred Stock
|
250,000
|
2,342,010
|
(2,592,010
|
)
|
—
|
|||||||||||||||||||||||
Net
loss
|
(4,432,187
|
)
|
(4,432,187
|
)
|
||||||||||||||||||||||||
Balance,
December 31, 2009
|
25,000,000
|
$
|
250,000
|
70,142,615
|
$
|
701,426
|
$
|
25,511,360
|
$
|
(18,744,470
|
)
|
$
|
7,718,316
|
See
accompanying notes to the consolidated financial statements
45
SpectraScience,
Inc. and Subsidiary
Consolidated
Statements of Cash Flows
For the
years ended December 31, 2009 and 2008
Year
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
OPERATING
ACTIVITIES:
|
||||||||
Net
loss
|
$
|
(4,432,187
|
)
|
$
|
(5,144,902
|
)
|
||
Adjustments
to reconcile net loss to cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
290,509
|
281,594
|
||||||
Stock-based
compensation employees
|
562,222
|
940,268
|
||||||
Stock-based
compensation consultants
|
133,402
|
51,955
|
||||||
Impairment
of LUMA equipment
|
760,776
|
—
|
||||||
Provision
for inventory obsolescence
|
100,000
|
—
|
||||||
Amortization
of prepaid financing costs
|
141,263
|
—
|
||||||
Fair
market value of common stock issued for services
|
284,705
|
40,500
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(16,394
|
)
|
(23,877
|
)
|
||||
Inventory
|
10,596
|
(179,172
|
)
|
|||||
Prepaid
expenses and other assets
|
(251,487
|
)
|
(43,907
|
)
|
||||
Accounts
payable
|
(125,979
|
)
|
190,711
|
|||||
Accrued
compensation and taxes
|
79,394
|
75,618
|
||||||
Net
cash used in operating activities
|
(2,463,180
|
)
|
(3,811,212
|
)
|
||||
INVESTING
ACTIVITIES:
|
||||||||
Acquisition
of fixed assets
|
(115,210
|
)
|
(207,136
|
)
|
||||
Net
cash used in investing activities
|
(115,210
|
)
|
(207,136
|
)
|
||||
FINANCING
ACTIVITIES:
|
||||||||
Net
proceeds from issuance of common stock
|
—
|
445,352
|
||||||
Net
proceeds from issuance of preferred stock
|
4,308,446
|
—
|
||||||
Proceeds
from exercise of stock options
|
60,000
|
3,000
|
||||||
Net
cash provided by financing activities
|
4,368,446
|
448,352
|
||||||
Net
increase (decrease) in cash and cash equivalents
|
1,790,056
|
(3,569,996
|
)
|
|||||
CASH
AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
1,618,181
|
5,188,177
|
||||||
CASH
AND CASH EQUIVALENTS AT END OF YEAR
|
$
|
3,408,237
|
$
|
1,618,181
|
||||
Supplemental
disclosure of non-cash investing and financing activities:
|
||||||||
Reclassification
of inventory to long-term assets
|
$
|
—
|
$
|
758,147
|
See
accompanying notes to the consolidated financial statements
46
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 Corp. 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.
In the
third fiscal quarter of 2008, the Company began selling its products and is no
longer a development stage company.
Note 2:
Significant Accounting Policies
Revenue
Recognition
In
accordance with Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition , the
Company recognizes revenues when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price is fixed or
determinable and collectibility is reasonably assured. Revenue from the sale of
the Company’s products is generally recognized when title and risk of loss
transfers to the customer, the terms of which are generally free on board
shipping point. The Company uses customer purchase orders to determine the
existence of an arrangement. The Company uses shipping documents and third-party
proof of delivery to verify that title has transferred. The Company assesses
whether the fee is fixed or determinable based upon the terms of the agreement
associated with the transaction. To determine whether collection is probable,
the Company assesses a number of factors, including past transaction history
with the customer and the creditworthiness of the customer.
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, 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. 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.
47
Inventory
Valuation
We state
our inventories at the lower of cost or market value, determined on a specific
cost basis. We provide inventory allowances when conditions indicate that the
selling price could be less than cost due to obsolescence and reductions in
estimated future demand. We balance the need to maintain strategic inventory
levels with the risk of obsolescence due to changing technology and customer
demand levels. Unfavorable changes in market conditions may result in a need for
additional inventory reserves that could adversely impact our gross margins.
Conversely, favorable changes in demand could result in higher gross margins
when we sell products.
Valuation
of Long-lived Assets
Our
long-lived assets consist of property and equipment and intangible assets.
Equipment is carried at cost and is depreciated over the estimated useful lives
of the assets, which are generally two to three years, and leasehold
improvements are amortized over the lesser of the lease term or the estimated
useful lives of the improvements. The straight-line method is used for
depreciation and amortization. Equipment related to our LUMA Systems is not
currently being depreciated but is reviewed for impairment at the end of each
reporting period. Intangible assets consist of patents and trademarks, which are
amortized using the straight-line method over the estimated useful lives of the
assets. We do not capitalize external legal costs and filing fees associated
with obtaining patents on our new discoveries Acquired intellectual property is
recorded at cost and is amortized over its estimated useful life. We believe the
useful lives we assigned to these assets are reasonable. The Company assesses
the recoverability of long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. These computations utilize judgments and assumptions inherent in
management’s estimate of future cash flows to determine recoverability of these
assets. If management’s assumptions about these assets were to change as a
result of events or circumstances, the Company may be required to record an
impairment loss. With respect to the Company’s long-lived assets, the Company
recorded impairment charges of approximately $761,000 and $0 for the years ended
December 31, 2009 and 2008.
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.
FASB ASC
Topic 740, Income Taxes (“ASC 740”), clarifies the accounting for uncertainty in
income taxes recognized in the financial statements. ASC 740 provides that a tax
benefit from an uncertain tax position may be recognized when it is more likely
than not that the position will be sustained upon examination, including
resolutions of any related appeals or litigation processes, based on the
technical merits of the position. Income tax positions must meet a
more-likely-than-not recognition threshold to be recognized. ASC 740 also
provides guidance on measurement, derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. We adopted
these provisions of ASC 740 on January 1, 2007, and the adoption did not have a
material impact on our consolidated financial position or results of
operations. We have determined that the Company does not have uncertain tax
positions on its 2004, 2005, 2006, 2007 and 2008 tax returns. Based on
evaluation of the 2009 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,
2009 and 2008, the Company has not recognized any tax benefits since
inception.
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, 2009 or 2008, and have not
recognized interest and/or penalties in the consolidated statement of operations
for the years ended December 31, 2009 or 2008.
We are
subject to taxation in the US 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.
Stock-Based
Compensation
We
account for stock-based compensation under the provisions of FASB ASC Topic
718, Compensation—Stock
Compensation (“ASC 718”), which
requires the measurement and recognition of compensation expense for all
stock-based awards made to employees and directors based on estimated fair
values on the grant date. We adopted ASC 718 on January 1, 2006. We
estimate the fair value of stock-based awards on the date of grant using the
Black-Scholes-Merton option pricing model (“Black-Scholes model”). The value of
the portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods using the straight-line method. We
estimate forfeitures at the time of grant and revise our estimate in subsequent
periods if actual forfeitures differ from those estimates.
We
account for stock-based compensation awards to non-employees in accordance with
FASB ASC Topic 505-50, Equity-Based Payments to
Non-Employees (“ASC 505-50”). Under ASC 505-50, we determine the
fair value of the warrants or stock-based compensation awards granted as either
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
48
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.
As of
December 31, 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 10,521,392 reserved at December 31, 2009. At December 31, 2009
the Company had outstanding 7,450,000 options under the Option Plan representing
approximately 10.62% of the outstanding shares (5,050,000 of which were
exercisable), with 3,071,392 available for future issuance. Awards under the
Company’s Option Plan generally vest over three years.
For the
years ended December 31, 2009 and 2008, stock-based compensation was
approximately $696,000 and $992,000, respectively. In fiscal 2009, stock option
expense was approximately $259,000 for research and development, $472,000 in
general and administration and ($35,000) in sales and marketing. In fiscal 2008,
stock option expense was approximately $430,000 in research and development,
$495,000 in general and administrative and $67,000 in sales and marketing.
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:
2009
|
2008
|
|||||||
Expected
life
|
5
years
|
5
years
|
||||||
Risk-free
interest rate
|
2.58
|
%
|
2.63
|
%
|
||||
Expected
volatility
|
124
|
%
|
125
|
%
|
||||
Expected
dividend yield
|
0
|
%
|
0
|
%
|
Management
used the following assumptions to value employee options over the past two
years:
2009
|
2008
|
|||||||
Expected
life
|
5
years
|
5
years
|
||||||
Risk-free
interest rate
|
2.36
|
%
|
2.21
|
%
|
||||
Expected
volatility
|
124
|
%
|
123
|
%
|
||||
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 historical trading
volume and becomes a risk-measurement component included in the Black-Scholes
calculation of estimated fair value. Management computed and reviewed 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 FASB ASC Topic 350 Goodwill and Other Intangibles
– 30 General
Intangibles Other than Goodwill . 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 an
independent appraisal using a market-based forecast which utilized comparable
assumed royalty revenue streams over several possible scenarios. These forecast
cash flows were then discounted to present value to determine
valuation.
49
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 both of the fiscal years ended December 31, 2009 and 2008 was
approximately $250,000. Patents are reported net of accumulated amortization of
$600,017 and $350,450 at December 31, 2009 and 2008, respectively. Amortization
expense in each of the five years subsequent to December 31, 2009 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, 2009 and 2008, research and
development costs were approximately $2,127,000 and $2,220,000, respectively. In
2009 the Company recognized approximately $761,000 of non-cash expense related
to the impairment of LUMA assets classified as long lived assets (equipment) as
well as approximately $100,000 in WavSTAT inventory obsolescence
expense.
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.
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, 2009 and 2008, depreciation expense was approximately $41,000 and
$32,000, 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, 2009
and 2008 includes approximately $1,786,000 and $1,837,000 of LUMA inventory,
respectively. The LUMA inventory included in fixed asset accounts is evaluated
for impairment at the end of each reporting period. During 2009, the Company
evaluated the ongoing value of the LUMA inventory due to difficulties
successfully marketing the LUMA System. Based on this evaluation, the Company
determined that LUMA assets with a carrying value of approximately $1,786,000
were impaired and wrote them down by approximately $761,000 to their estimated
fair value. The estimated fair value was based upon an estimate of market value
in a favorable arm’s length transaction.
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.
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 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, 2009, utilizing the treasury stock
method, there were 16,889,258 additional potentially dilutive shares of common
stock. These additional shares include the common stock equivalent effect of
25,000,000 shares of Series B Convertible Preferred Stock, 15,764,000
outstanding warrants and 7,450,000 options. For the year ended December 31,
2008, there were 8,937,966 additional potentially dilutive shares of common
stock due primarily to the effect of outstanding warrants and stock options.
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.
50
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 superseded all then-existing non-SEC accounting
and reporting standards. All other non-grandfathered non-SEC accounting
literature not included in the Codification became 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.
Note 3:
Inventories
Inventories
consisted of the following at December 31, 2009 and 2008. Included in inventory
is an inventory reserve for obsolescence of approximately $100,000 and $0 at
December 31, 2009 and 2008 respectively:
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Raw
Materials
|
$
|
175,527
|
$
|
205,651
|
||||
Finished
Goods
|
230,148
|
260,230
|
||||||
Total
inventories
|
$
|
405,675
|
$
|
465,881
|
51
Note 4:
Income Taxes
The
significant components of deferred tax assets as of December 31, 2009 and 2008
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,
2009
|
|
|
Year Ended
December 31,
2008
|
||||
Deferred
tax assets:
|
||||||||
Net
operating loss carryforward
|
$
|
11,180,062
|
$
|
10,678,283
|
||||
Research
and development credits
|
512,515
|
634,274
|
||||||
Stock
compensation
|
1,477,485
|
1,221,793
|
||||||
Inventory
Reserve
|
34,802
|
—
|
||||||
Accrued
liabilities and other
|
45,082
|
26,085
|
||||||
Total
deferred tax assets
|
13,249,946
|
12,560,435
|
||||||
Valuation
allowance
|
(11,691,089
|
)
|
(10,589,131
|
)
|
||||
Net
deferred tax assets
|
1,558,857
|
1,971,304
|
||||||
Deferred
tax liabilities:
|
||||||||
Acquired
intangibles
|
(73,611
|
)
|
(81,348
|
)
|
||||
Fixed
assets
|
(397,293
|
)
|
(710,326
|
)
|
||||
Patents
|
(1,087,953
|
)
|
(1,179,630
|
)
|
||||
Luma
asset acquisition with common stock
|
—
|
—
|
||||||
Total
deferred tax liabilities
|
(1,558,857
|
)
|
(1,971,304
|
)
|
||||
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, 2009
|
|
Year Ended December 31, 2008
|
|
|||||||
|
|
Amount
|
|
% of Pretax
Income
|
|
Amount
|
|
% of Pretax
Income
|
|||
Income
tax at federal statutory rate
|
$
|
(1,506,000
|
)
|
34.0
|
%
|
$
|
(1,750,000
|
)
|
34.0
|
%
|
|
State
tax provision, net of federal tax benefit
|
(259,000
|
)
|
5.8
|
(300,000
|
)
|
5.8
|
|||||
Nondeductible
differences
|
(17,000
|
)
|
0.4
|
28,000
|
(0.5
|
)
|
|||||
Tax
credits
|
41,000
|
(0.9)
|
(55,000
|
)
|
1.1
|
||||||
Change
in valuation allowance
|
1,102,000
|
(24.9
|
)
|
901,000
|
(17.5
|
)
|
|||||
Expiration
of net operating losses
|
593,000
|
(13.4
|
)
|
1,056,000
|
(20.5
|
)
|
|||||
Other
|
46,000
|
(1.0
|
)
|
120,000
|
(2.3
|
)
|
|||||
Provision
for income taxes
|
$
|
—
|
0.0
|
%
|
$
|
—
|
0.0
|
%
|
At
December 31, 2009, the Company had federal net operating loss carry-forwards of
approximately $27,800,000 that expire from 2010 through 2029. During 2009, the
Company had federal net operating losses of approximately $1,540,000
expire. In addition, the Company had research and development tax
credits of approximately $478,000 that expire from 2010 through 2029. 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.
The
Company has a history of operating losses and, as of yet, has not had any
taxable income. The Company has calculated a deferred tax asset for its tax
credits but offsets the tax asset with a valuation allowance. As a result, the
Company has not realized or recorded any tax benefit related to its tax
credits.
52
Note 5:
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 $4,318 and additional shared facility
costs of $972 per month through December 2011. Total commitment under this lease
for 2010 and 2011 is approximately $64,000 each year. For the years ended
December 31, 2009 and 2008, rent expense totaled $80,332 and $97,873,
respectively.
Note 6:
Stock-Based Compensation Plans
The
Option Plan was amended in 2004. The Option Plan provides for the grant of ISOs
to our full-time employees (who may also be Directors) and 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 10,521,392 at December 31,
2009. At December 31, 2009, the Company had granted 7,450,000 options under the
Plan (5,050,000 of which are exercisable), with 3,071,392 available for future
issuance.
Options
outstanding that have vested and are expected to vest as of December 31, 2009
are as follows:
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted Average
Remaining
Contractual Term in
Years
|
|
Aggregate
Intrinsic
Value (1)
|
|
|||
Vested
|
5,050,000
|
|
$
|
0.64
|
|
6.97
|
$
|
—
|
||
Expected
to vest
|
2,400,000
|
$
|
0.25
|
9.99
|
360,000
|
|||||
Total
|
7,450,000
|
$
|
360,000
|
(1) These
amounts represent the difference, if any, between the exercise price and $0.40,
the closing market price of the Company’s common stock on December 31, 2009 as
quoted on the Over-the-Counter Bulletin 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, 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
|
||||||||||||
Options
granted
|
(1,100,000
|
)
|
1,100,000
|
$
|
0.31
|
|||||||||||
Options
exercised
|
400,000
|
(400,000
|
)
|
$
|
0.15
|
|||||||||||
Options
forfeited
|
1,400,000
|
(1,400,000
|
)
|
$
|
0.71
|
|||||||||||
Additional
options authorized
|
229,352
|
—
|
$
|
|
||||||||||||
December
31, 2009
|
3,071,392
|
7,450,000
|
$
|
0.54
|
7.71
|
$
|
—
|
|||||||||
Exercisable
December 31, 2009
|
5,050,000
|
$
|
0.64
|
6.97
|
$
|
—
|
The total
intrinsic value of options exercised during the years ended December 31, 2009
and 2008 was $160,000 and $13,000, respectively. At December 31, 2009, total
unrecognized estimated employee and director compensation cost related to
non-vested stock options granted prior to that date is $454,476, which is
expected to be recognized over approximately 3 years.
For the
fiscal year ended December 31, 2009, the Company granted stock options to
purchase 400,000 common shares to employees and directors. At the time of grant,
those options were estimated to have an aggregate fair value of approximately
$91,000. 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, these options were estimated to have an aggregate fair value of
approximately $1,070,000.
53
Note 7:
Undesignated Capital Stock
The
Company has authorized 40,000,000 of undesignated shares of capital stock with
undesignated par value. 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 8:
Equity Transactions
Fiscal
Year Ended December 31, 2009
Common
Stock
On
January 30, 2009, we entered into a Common Stock Purchase Agreement (the
“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 pursuant to the Purchase
Agreement. 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.
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 declared
effective such registration statement, which occurred on May 5, 2009, generally
we received 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 does 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. 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.
In
December 2009, the Company issued 35,000 restricted common shares to a vendor
for services. The fair value of the shares was determined to be $11,200, and the
company recognized expense in the amount of $11,200, based upon the market value
of the stock on the date of issuance.
Series
B Convertible Preferred Stock and Warrants
On June
22, 2009, the Board of Directors designated 25,000,000 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 at December 31,
2009, the total liquidation preference is equal to $5,100,000. At December 31,
2009 there were approximately $100,000 in accumulated, but unpaid 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) the underlying conversion shares
becoming freely tradable and the average daily trading volume of the underlying
stock being not less than 50,000, nor the average closing price of the
underlying stock being not less than the conversion price then in effect for 10
consecutive trading days.
54
From May
through December 2009, as a part of a Units offering, the Company sold
25,000,000 shares of its Preferred to accredited investors for an aggregate
consideration of $5,000,000. The Company received net cash proceeds of
$4,308,446 after the payment of finders’ fees and expenses of $691,554. In
addition, the Company issued five-year warrants to purchase 12,500,000
additional shares of Common Stock at an initial exercise price of $0.30 per
share and 2,500,000 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 option pricing model at the time of issuance, was approximately
$850,000. 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 $2,592,000 and $2,349,000,
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 125% and 122% and risk-free interest rates of between 1.98% and
2.74%. 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 stockholders 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.
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.
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.
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.
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.
Series
A Convertible Preferred Stock Warrants
In
December 2008 the holders of 71,250 of the Company’s Series A Preferred Warrants
affected 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.
In May
2008 the holders of 153,750 of the Company’s Series A Preferred Warrants
affected 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.
In April
2008 a holder of 25,000 of the Company’s Series A Preferred Warrants affected 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.
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
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.
55
Note 9:
Related Party Transactions
On July
21, 2009, the Board of Directors approved the grant of 400,000 options to a
non-employee director. 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 10:
License Agreement
The
Company is the exclusive licensee through the Massachusetts General Hospital of
US 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, 2009, revenues have been generated from sales of
products using this patent and royalties in an amount of $1,260 have been
paid.
Note 11:
Fair Value of Long Lived Assets
The Fair
Value Measurements and Disclosures Topic of the FASB Accounting Standards
Codification defines fair value establishes a framework for measuring fair value
and requires disclosure of fair value measurements, Effective January 1, 2009,
the Company adopted the portion of the Topic which requires disclosure of
nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value on a nonrecurring basis. The fair value hierarchy set
forth in the Topic is as follows:
Level
1: Quoted prices (unadjusted) for identical assets or
liabilities in active markets that the entity has the ability to access as of
the measurement date.
Level
2: Significant other observable inputs other than Level 1
prices such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data.
Level
3: Significant unobservable inputs that reflect a reporting
entity’s own assumptions about the assumptions that market participants would
use in pricing an asset or liability.
A
description of the valuation methodologies used for assets and liabilities
measured at fair value, as well as the general classification of such
instruments pursuant to the valuation hierarchy, is set forth
below.
The
Company does not record long lived assets at fair value on a recurring basis.
However, from time to time, a long lived asset is considered impaired and the
asset value is written down. The impairment is based on management’s estimate of
future cash flows from these assets. Adjustments are based on unobservable
inputs, the resulting fair value measurement is categorized as a level 3
measurement. Total LUMA equipment of approximately $1,786,000 was valued under
this level as of December 31, 2009.
Note 12:
Subsequent Events
Common
Stock
In
January 2010, the Board approved the issuance of 249,213 shares of Common Stock
for payment of accrued dividends related to the Company’s outstanding
Convertible Preferred Stock (“Preferred”). The Preferred accumulated a dividend
equal to $99,685 on December 31, 2009. As per the terms of the Series B
Preferred the Company may pay the dividend either in cash or Common Stock as
determined by the Board of Directors.
From
January through March 2010, the Company issued 105,000 restricted common shares
to a vendor for services. The fair value of the shares was determined to be
$39,550, and the company recognized expense in the amount of $39,550, based upon
the market value of the stock on the date of issuance.
In
February and March 2010, holders of 19,600,000 Preferred converted their
Preferred into a like number of unrestricted shares of Common Stock as per the
terms of the Preferred.
Subsequent
events have been evaluated through the date financial statements are filed with
the Securities and Exchange Commission.
56
SpectraScience,
Inc and Subsidiary
Unaudited
Financial Statements
March
31, 2010
SpectraScience,
Inc. and Subsidiary
Consolidated
Balance Sheets
March 31,
2010
|
December 31,
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$
|
2,677,336
|
$
|
3,408,237
|
||||
Accounts
Receivable (net)
|
23,668
|
40,271
|
||||||
Inventories
(net of allowances)
|
422,333
|
405,675
|
||||||
Prepaid
expenses and other current assets
|
145,373
|
195,568
|
||||||
Total
current assets
|
3,268,710
|
4,049,751
|
||||||
Fixed
assets, net
|
1,118,353
|
1,139,839
|
||||||
Patents,
net
|
2,853,592
|
2,915,984
|
||||||
TOTAL
ASSETS
|
$
|
7,240,655
|
$
|
8,105,574
|
||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$
|
182,651
|
$
|
219,783
|
||||
Accrued
liabilities
|
70,557
|
167,475
|
||||||
Total
current liabilities
|
253,208
|
387,258
|
||||||
STOCKHOLDERS’
EQUITY
|
||||||||
Series
B Convertible Preferred Stock, $.01 par value:
|
||||||||
Authorized
– 25,000,000; shares issued and outstanding – 6,535,000 shares at March
31, 2010 (25,000,000 shares at December 31, 2009)
|
65,350
|
250,000
|
||||||
Common
stock, $.01 par value:
|
||||||||
Authorized—160,000,000
shares
|
||||||||
Issued
and outstanding 88,712,615 shares at March 31, 2010 (70,142,615 shares at
December 31, 2009)
|
887,126
|
701,426
|
||||||
Additional
paid-in capital
|
25,599,759
|
25,511,360
|
||||||
Accumulated
(deficit)
|
(19,564,788
|
)
|
(18,744,470
|
)
|
||||
TOTAL
STOCKHOLDERS’ EQUITY
|
6,987,447
|
7,718,316
|
||||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
7,240,655
|
$
|
8,105,574
|
Note: The
balance sheet at December 31, 2009 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.
57
SpectraScience,
Inc. and Subsidiary
CONDENSED
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
Revenue
|
$
|
11,150
|
$
|
49,110
|
||||
Cost
of revenue
|
2,479
|
22,135
|
||||||
Gross
profit
|
8,671
|
26,975
|
||||||
Operating
expenses:
|
||||||||
Research
and development
|
224,392
|
465,845
|
||||||
General
and administrative
|
511,287
|
464,776
|
||||||
Sales
and marketing
|
92,104
|
186,536
|
||||||
Total
operating expenses
|
827,783
|
1,117,157
|
||||||
Operating
loss
|
(819,112
|
)
|
(1,090,182
|
)
|
||||
Other
income (expense), net
|
(1,206
|
)
|
2,839
|
|||||
Net
Loss
|
(820,318
|
)
|
(1,087,343
|
)
|
||||
Accumulated
but unpaid dividend on preferred stock
|
(81,319
|
)
|
-
|
|||||
Net
loss applicable to common stockholders
|
(901,637
|
)
|
(1,087,343
|
)
|
||||
Basic
and diluted net loss per share
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
||
Weighted
average common shares outstanding
|
74,805,948
|
69,525,279
|
See
accompanying notes to unaudited condensed financial statements.
58
SpectraScience,
Inc. and Subsidiary
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
For the
three months ended March 31, 2010
(Unaudited)
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
Paid-In
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
||||||||||||||||||||||
Balance,
December 31, 2009
|
25,000,000
|
250,000
|
70,142,615
|
$
|
701,426
|
$
|
25,511,360
|
$
|
(18,744,470
|
)
|
$
|
7,718,316
|
||||||||||||||||
Stock
based compensation – consultants
|
11,369
|
11,369
|
||||||||||||||||||||||||||
Stock
based compensation – employees
|
38,180
|
38,180
|
||||||||||||||||||||||||||
Common
stock issued for services
|
105,000
|
1,050
|
38,850
|
39,900
|
||||||||||||||||||||||||
Conversion
of Series B Preferred Stock
|
(18,465,000
|
)
|
(184,650
|
)
|
18,465,000
|
184,650
|
-
|
|||||||||||||||||||||
Net
loss
|
(820,318
|
)
|
(820,318
|
)
|
||||||||||||||||||||||||
Balance,
March 31, 2010
|
6,535,000
|
$
|
65,350
|
88,712,615
|
$
|
887,126
|
$
|
25,599,759
|
$
|
(19,564,788
|
)
|
$
|
6,987,447
|
See
accompanying notes to unaudited condensed financial statements.
59
SpectraScience,
Inc. and Subsidiary
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
OPERATING
ACTIVITIES:
|
||||||||
Net
loss
|
$
|
(820,318
|
)
|
$
|
(1,087,343
|
)
|
||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
83,878
|
71,050
|
||||||
Stock-based
compensation employees
|
38,180
|
230,634
|
||||||
Stock-based
compensation consultants
|
11,369
|
7,370
|
||||||
Amortization
of prepaid financing costs
|
38,219
|
|||||||
Fair
market value of common stock issued for services
|
39,900
|
|||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
16,603
|
(24,887
|
)
|
|||||
Inventory
|
(16,658
|
)
|
108,016
|
|||||
Prepaid
expenses and other current assets
|
11,976
|
33,188
|
||||||
Accounts
payable
|
(37,132
|
)
|
(98,548
|
)
|
||||
Accrued
liabilities
|
(96,918
|
)
|
(28,172
|
)
|
||||
Net
cash used in operating activities
|
(730,901
|
)
|
(788,682
|
)
|
||||
INVESTING
ACTIVITIES:
|
||||||||
Purchases
of fixed assets
|
-
|
(11,839
|
)
|
|||||
Net
cash (used in) investing activities
|
-
|
(11,839
|
)
|
|||||
Net
(decrease) in cash and cash equivalents
|
(730,901
|
)
|
(800,531
|
)
|
||||
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
3,408,237
|
1,618,181
|
||||||
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$
|
2,677,336
|
$
|
817,650
|
||||
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.
60
SpectraScience,
Inc.
Notes
to Unaudited Condensed Financial Statements
March
31, 2010
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. The “Company”
refers to SpectraScience, Inc. and its wholly owned subsidiary Luma Imaging
Corporation. Since 1996, the Company has 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 scans 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 determination. The
WavSTAT System operates by using cool, safe UV laser light to optically scan 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 System 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.
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 Form 10-Q 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 three-month period ended March 31, 2010 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2010. These statements should be read in conjunction with the financial
statements and related notes, which are included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2009.
Liquidity
and Capital Resources
Historically,
the Company’s sources of cash have included the issuance and sales of equity
securities and interest income. The Company’s historical cash outflows have been
primarily associated with cash used for operating activities including research
and development, administrative and sales activities. Fluctuations in the
Company’s working capital due to timing differences of our cash receipts and
cash disbursements also impact our cash flow. For the three-month period ending
March 31, 2010, the Company used $730,901 in cash to fund operating activities.
As of March 31, 2010, the Company had working capital of $3,015,502 and a cash
balance of $2,677,336.
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. As of May
17, 2010, the Company had not sold any shares to Fusion Capital.
The
Company expects to incur significant additional operating losses through at
least 2010, as it completes clinical trials, begins outcome-based clinical
studies and increases sales and marketing efforts to commercialize the WavSTAT
System. If the Company does not receive sufficient funding, the Company may be
unable to continue as a going concern. The Company may incur unknown expenses or
may not be able to meet its revenue forecast, and one or more of these
circumstances would require the Company to seek additional capital. The Company
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.
61
2. Summary of Significant Accounting
Policies
Revenue
recognition
In
accordance with Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition , the
Company recognizes revenues when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price is fixed or
determinable and collectability is reasonably assured. Revenue from the sale of
the Company’s products is generally recognized when title and risk of loss
transfers to the customer, the terms of which are generally free on board
shipping point. The Company use customer purchase orders to determine the
existence of an arrangement. The Company uses shipping documents and third-party
proof of delivery to verify that title has transferred. The Company assesses
whether the fee is fixed or determinable based upon the terms of the agreement
associated with the transaction. To determine whether collection is probable,
the Company assesses a number of factors, including past transaction history
with the customer and the creditworthiness of the customer.
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 short
history of product sales, 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 financials 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.
Inventory
Valuation
The
Company states its inventories at the lower of cost or market value, determined
on a specific cost basis. The Company provides inventory allowances when
conditions indicate that the selling price could be less than cost due to
obsolescence and reductions in estimated future demand. The Company balances the
need to maintain strategic inventory levels with the risk of obsolescence due to
changing technology and customer demand levels. Unfavorable changes in market
conditions may result in a need for additional inventory reserves that could
adversely impact the Company’s gross margins. Conversely, favorable changes in
demand could result in higher gross margins when the Company sells
products.
Valuation
of Long-lived Assets
The
Company’s long-lived assets consist of property and equipment and intangible
assets. Equipment is carried at cost and is depreciated over the estimated
useful lives of the assets, which are generally two to three years, and
leasehold improvements are amortized over the lesser of the lease term or the
estimated useful lives of the improvements. The straight-line method is used for
depreciation and amortization. Equipment related to the Company’s LUMA systems
are not currently being depreciated but are reviewed for impairment at the end
of each reporting period. Intangible assets consist of patents and trademarks,
which are amortized using the straight-line method over the estimated useful
lives of the assets. The Company does not capitalize external legal costs and
filing fees associated with obtaining patents on its new discoveries. Acquired
intellectual property is recorded at cost and is amortized over its estimated
useful life. The Company believes the useful lives assigned to these assets are
reasonable. The Company assesses the recoverability of long-lived assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. These computations utilize judgments and
assumptions inherent in management’s estimate of future cash flows to determine
recoverability of these assets. If management’s assumptions about these assets
were to change as a result of events or circumstances, the Company may be
required to record an impairment loss.
Stock-Based
Compensation
The
Company accounts for stock-based compensation under the provisions of FASB ASC
Topic 718, Compensation—Stock
Compensation (“ASC 718”), which
requires the measurement and recognition of compensation expense for all
stock-based awards made to employees and directors based on estimated fair
values on the grant date. The Company adopted ASC 718 on January 1, 2006.
The Company estimates the fair value of stock-based awards on the date of grant
using the Black-Scholes-Merton option-pricing model (“Black-Scholes Model”). The
value of the portion of the award that is ultimately expected to vest is
recognized as expense over the requisite service periods using the straight-line
method. The Company estimates forfeitures at the time of grant and revises its
estimate in subsequent periods if actual forfeitures differ from those
estimates.
The
Company accounts for stock-based compensation awards to non-employees in
accordance with FASB ASC Topic 505-50, Equity-Based Payments to
Non-Employees (“ASC 505-50”). Under ASC 505-50, the Company
determines the fair value of the warrants or stock-based compensation awards
granted as either the fair value of the consideration received or the fair value
of the equity instruments issued, whichever is more reliably
measurable.
62
All
issuances of stock options or other equity instruments to employees and
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.
As of
March 31, 2010, 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,
customers, 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 13,306,892 reserved at March 31, 2010. At March 31, 2010
the Company had outstanding 7,400,000 options under the Option Plan representing
approximately 8.3% of the outstanding shares (5,016,667 of which were
exercisable), with 5,906,892 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 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
stock options granted during the three months ending March 31, 2009. There were
no stock options granted during the three months ended March 31, 2010:
2010
|
2009
|
|||||||
Expected
life
|
-
|
5 years
|
||||||
Risk-free
interest rate
|
-
|
2.02
|
%
|
|||||
Expected
volatility
|
-
|
122
|
%
|
|||||
Expected
dividend yield
|
-
|
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 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 five-year U.S. Treasury rate as published at
the time of making the calculations.
Volatility
is a calculation based on the Company’s stock price since the beginning of the
successor company. 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 its area of interest, the current early revenue 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).
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, 2009
|
3,071,392 | 7,450,000 | $ | 0.54 | 7.71 | - | ||||||||||||||
Options
granted
|
- | - | - | |||||||||||||||||
Options
exercised
|
- | - | - | |||||||||||||||||
Options
forfeited
|
50,000 | (50,000 | ) | $ | 0.80 | |||||||||||||||
Additional
options authorized
|
2,785,500 | |||||||||||||||||||
Outstanding
at March 31, 2010
|
5,906,892 | 7,400,000 | $ | 0.54 | 7.46 | - | ||||||||||||||
Exercisable
at March 31, 2010
|
5,016,667 | $ | 0.59 | 6.71 | - |
There
were no options exercised during the three months ended March 31, 2010 or 2009.
At March 31, 2010, total unrecognized estimated employee compensation cost
related to non-vested stock options granted prior to that date is approximately
$404,000, which is expected to be recognized over the next two
years.
63
Impairment
or Disposal of Long-Lived Assets
Current
accounting standards address financial accounting and reporting for the
impairment or disposal of long-lived assets (such as the Company’s patents).
Long-lived assets are to 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 standards on August 2, 2004. Management believes that no impairment exists
at March 31, 2010.
Inventories
Inventories
consisted of the following at March 31, 2010 and December 31, 2009:
March 31, 2010
|
December 31, 2009
|
|||||||
Raw
materials
|
$
|
230,148
|
$
|
175,527
|
||||
Finished
goods
|
192,185
|
230,148
|
||||||
Totals
|
$
|
422,333
|
$
|
405,675
|
Earnings
(Loss) Per Share
Basic
earnings (loss) per share is computed by dividing net income (loss) available to
common stockholders 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 three months ended March 31, 2010 and 2009, 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 months ended
March 31, 2010 include exercisable stock options to purchase 2,200,000 shares of
common stock, warrants to purchase 15,000,000 shares of common stock and
preferred stock convertible into 6,535,000 shares of common stock. If converted
under the treasury method, these instruments would have resulted in an
additional approximate 5,673,000 equivalent common shares
outstanding.
3.
Stockholders Equity
Common
Stock
In
February and March 2010, holders of 18,465,000 shares of Series B Convertible
Preferred Stock converted their holdings into an equal number of shares of
unrestricted Common Stock. The aforementioned Common Stock was registered with
the effectiveness of a Registration Statement accepted by the Securities and
Exchange Commission on February 11, 2010.
Between
January and March 2010, the Company issued 105,000 restricted common shares to a
vendor for services. The fair value of the shares was determined to be $39,900,
and the Company recognized expense in the amount of $39,900, based upon the
market value of the stock on the dates of issuance.
Series
B Convertible Preferred Stock
In
February and March 2010, holders of 18,465,000 shares of Series B Convertible
Preferred Stock converted their holdings into an equal number of shares of
unrestricted Common Stock. The aforementioned Common Stock was registered with
the effectiveness of a Registration Statement accepted by the Securities and
Exchange Commission on February 11, 2010. At March 31, 2010, there remained
outstanding 6,535,000 shares of Series B Convertible Preferred
Stock.
4.
Subsequent Events
Common
Stock
Between
March 31, 2010 and May 17, 2010, holders of 3,400,000 shares of Series B
Convertible Preferred Stock Converted their holdings into an equal number of
shares of unrestricted Common Stock. The aforementioned Common Stock was
registered with the effectiveness of a Registration Statement accepted by the
Securities and Exchange Commission on February 11, 2010.
In April
2010, the Company issued 35,000 restricted common shares to a vendor for
services. The fair value of the shares was determined to be $9,450 and the
company recognized expense in the amount of $9,450, based upon the market value
of the stock on the dates of issuance.
Series
B Convertible Preferred Stock
Between
March 31, 2010 and May 17, 2010, holders of 3,400,000 shares of Series B
Convertible Preferred Stock Converted their holdings into an equal number of
shares of unrestricted Common Stock. The aforementioned Common Stock was
registered with the effectiveness of a Registration Statement accepted by the
Securities and Exchange Commission on February 11, 2010. At May 17,
2010, there remained outstanding 3,400,000 shares of Series B Convertible
Preferred Stock.
64
Series
C Convertible Preferred Stock
On April
29, 2010, we designated 25,000,000 of our Undesignated Shares as Series C
Preferred Stock. The Series C Preferred Stock contains the rights and
preferences set forth in the Certificate of Designation of Rights and
Preferences of Series C Preferred Stock, which are generally the same as the
Series B Preferred Stock, but without any cumulative dividend
payable.
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
|
$
|
503.62
|
||
Accounting
Fees and Expenses
|
$
|
7,500.00
|
||
Legal
Fees and Expenses
|
$
|
8,000.00
|
||
Miscellaneous
|
$
|
2,500.00
|
||
TOTAL
|
$
|
18,503.62
|
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.
II-1
ITEM
15. RECENT SALES OF UNREGISTERED SECURITIES
Events
Subsequent to March 31, 2010
Common
Stock
Between
March 31, 2010 and May 17, 2010, holders of 3,400,000 shares of Series B
Convertible Preferred Stock Converted their holdings into an equal number of
shares of unrestricted Common Stock. The aforementioned Common Stock was
registered with the effectiveness of a Registration Statement accepted by the
Securities and Exchange Commission on February 11, 2010.
In April
2010, the Company issued 35,000 restricted common shares to a vendor for
services. The fair value of the shares was determined to be $9,450 and the
company recognized expense in the amount of $9,450, based upon the market value
of the stock on the dates of issuance.
Series
B Convertible Preferred Stock
Between
March 31, 2010 and May 17, 2010, holders of 3,400,000 shares of Series B
Convertible Preferred Stock Converted their holdings into an equal number of
shares of unrestricted Common Stock. The aforementioned Common Stock was
registered with the effectiveness of a Registration Statement accepted by the
Securities and Exchange Commission on February 11, 2010. At May 17,
2010, there remained outstanding 3,400,000 shares of Series B Convertible
Preferred Stock.
Series
C Convertible Preferred Stock and Warrants
On April
29, 2010, we designated 25,000,000 of our Undesignated Shares as Series C
Preferred Stock. The Series C Preferred Stock contains the rights and
preferences set forth in the Certificate of Designation of Rights and
Preferences of Series C Preferred Stock, which are generally the same as the
Series B Preferred Stock, but without any cumulative dividend payable. From
March 31, 2010 until the date of this Prospectus, the Company sold 15,766,155
shares of Series C Convertible Preferred Stock including common stock purchase
warrants to purchase 7,883,078 shares at $0.30 per share and common stock
purchase warrants to purchase 1,576,616 shares at $0.35 per share. The Company
received gross proceeds of $3,153,231 from the sale and net proceeds of
$2,699,843 after payment of $453,388 in fees.
Three-Month
Period Ending March 31, 2010
Common
Stock
In
February and March 2010, holders of 18,465,000 shares of Series B Convertible
Preferred Stock converted their holdings into an equal number of shares of
unrestricted Common Stock. The aforementioned Common Stock was registered with
the effectiveness of a Registration Statement accepted by the Securities and
Exchange Commission on February 11, 2010.
Between
January and March 2010, the Company issued 105,000 restricted common shares to a
vendor for services. The fair value of the shares was determined to be $39,900,
and the Company recognized expense in the amount of $39,900, based upon the
market value of the stock on the dates of issuance.
Series
B Convertible Preferred Stock
In
February and March 2010, holders of 18,465,000 shares of Series B Convertible
Preferred Stock converted their holdings into an equal number of shares of
unrestricted Common Stock. The aforementioned Common Stock was registered with
the effectiveness of a Registration Statement accepted by the Securities and
Exchange Commission on February 11, 2010. At March 31, 2010, there remained
outstanding 6,535,000 shares of Series B Convertible Preferred
Stock.
Fiscal
Year Ended December 31, 2009
Common
Stock
In
December 2009, the Company issued 35,000 restricted shares of Common Stock to a
vendor for services. The fair value of the shares was determined to be $11,200,
and the Company recognized expense in the amount of $11,200, based upon the
market value of the stock on the date of issuance. This transaction was deemed
to be exempt from the registration requirements of the Securities Act of 1933
pursuant to Regulation D promulgated under the Securities Act of
1933.
On
January 30, 2009, we entered into a Common Stock Purchase Agreement (the
“Purchase Agreement”) with Fusion Capital Fund II, LLC, 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. The fair value of the shares
was determined to be $273,504 based upon the market value of the stock on the
date of issuance. The Company recognized non-cash amortization expense of
$141,263 for the fiscal year ended December 31, 2009 related to this issuance.
This transaction was deemed to be exempt from the registration requirements of
the Securities Act of 1933 pursuant to Regulation D promulgated under the
Securities Act of 1933.
II-2
Series
B Convertible Preferred Stock and Warrants
On June
22, 2009, the Board of Directors designated 25,000,000 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) the underlying conversion shares becoming
freely tradable and the average daily trading volume of the underlying stock
being not less than 50,000, nor the average closing price of the underlying
stock being not less than the conversion price then in effect for 10 consecutive
trading days.
From May
through December 31, 2009, as a part of a Units offering, the Company sold
25,000,000 shares of its Preferred to accredited investors for an aggregate
consideration of $5,000,000. The Company received net cash proceeds of
$4,308,446 after the payment of finders’ fees and expenses of $691,554. In
addition, the Company issued five-year warrants to purchase 12,500,000
additional shares of Common Stock at an initial exercise price of $0.30 per
share and 2,500,000 agent warrants at an initial exercise price of $0.35 per
share. 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 $2,592,000 and $2,349,000,
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 125% and 122% and risk-free interest rates of between 1.98% and
2.74%. 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 stockholders 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. Our Series B Convertible Preferred
Stock accrues an 8% dividend which ranks senior to any dividend which would be
paid on our Common Stock. No dividend or distribution can be paid or accrued
unless all accrued dividends in Series B Convertible Preferred Stock are paid in
full. This transaction was deemed to be 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
September 2009, 400,000 stock options held by a former director were exercised.
The Company received net proceeds of $60,000 as a result of the exercise. The
transaction was deemed to be exempt from registration under the Securities Act
in reliance on Rule 701 in that the transaction was under a compensatory benefit
plan as provided under such rule.
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.
II-3
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.
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.
II-4
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.
II-5
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 (8)
|
|
4.1
|
Certificate
of Designation for Series B Preferred Stock (7)
|
|
4.2
|
Stock
Purchase Warrant for Series B Preferred Stock (9)
|
|
4.3
|
Subscription
Agreement for Units Offering (10)
|
|
4.4
|
Stock
Purchase Warrants for Series C Preferred Stock (11)
|
|
4.5
|
Certificate
of Designation for Series C Preferred Stock (12)
|
|
5.1
|
Opinion
of Counsel (1)
|
|
10.1*
|
Form
of Director’s Option Agreement (8)
|
|
10.2*
|
SpectraScience,
Inc. Amended 2001 Stock Plan (4)
|
|
10.3
|
Common
Stock Purchase Agreement dated as of January 30, 2009, by and between the
Company and Fusion Capital Fund II, LLC (5)
|
|
10.4
|
Registration
Rights Agreement dated as of January 30, 2009, by and between the Company
and Fusion Capital Fund II, LLC (6)
|
|
21.1
|
Subsidiaries
of SpectraScience, Inc. (LUMA Imaging Corporation)
|
|
23.1
|
Consent
of McGladrey & Pullen, LLP (1)
|
|
23.2
|
Consent
of Fredrikson & Byron, P.A. (Included in Exhibit 5.1 to this
Registration Statement)
|
*
|
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 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.
|
|
(5)
|
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.
|
|
(6)
|
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.
|
|
(7)
|
Incorporated
by reference to exhibit 4.4 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.
|
|
(8)
|
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.
|
|
(9)
|
Incorporated
by reference to exhibit 4.5 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 exhibit 4.4 to the Company’s Current Report on Form 8-K
(File number 000-13092) as filed with the SEC on June 24,
2010.
|
II-6
(11)
|
Incorporated
by reference to exhibit 4.5 to the Company’s Current Report on Form 8-K
(File number 000-13092) as filed with the SEC on June 24,
2010.
|
|
(12)
|
Incorporated
by reference to exhibit 4.6 to the Company’s Current Report on Form 8-K
(File number 000-13092) as filed with the SEC on June 24,
2010.
|
II-7
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.
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.
II-8
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of San Diego, state of
California, on June 28, 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
|
June
28, 2010
|
||
Jim
Hitchin
|
(principal
executive officer)
|
|||
/s/ Jim
Dorst
|
Chief
Financial Officer
|
June
28, 2010
|
||
Jim
Dorst
|
(principal
financial officer and principal accounting officer)
|
|||
/s/ Mark D.
McWilliams
|
Director
|
June
28, 2010
|
||
Mark
D. McWilliams
|
||||
/s/ F. Duwaine
Townsen
|
Director
|
June
28, 2010
|
||
F.
Duwaine Townsen
|
||||
/s/ Stanley J.
Pappelbaum
|
Director
|
June
28, 2010
|
||
Stanley
J. Pappelbaum, M.D.
|
||||
/s/ Chester E. Sievert,
Jr.
|
Director
|
June
28, 2010
|
||
Chester
E. Sievert, Jr.
|
||||
/s/ Sheldon L.
Miller
|
Director
|
June
28, 2010
|
||
Sheldon
L. Miller
|
II-9