Attached files
| file | filename |
|---|---|
| EX-31.2 - EXHIBIT 31.2 - SPECTRASCIENCE INC | v239958_ex31-2.htm |
| EX-32.2 - EXHIBIT 32.2 - SPECTRASCIENCE INC | v239958_ex32-2.htm |
| EX-31.1 - EXHIBIT 31.1 - SPECTRASCIENCE INC | v239958_ex31-1.htm |
| EX-32.1 - EXHIBIT 32.1 - SPECTRASCIENCE INC | v239958_ex32-1.htm |
| EXCEL - IDEA: XBRL DOCUMENT - SPECTRASCIENCE INC | Financial_Report.xls |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
Commission file number 0-13092
SPECTRASCIENCE, INC.
(Exact name of registrant
as specified in its charter)
|
Minnesota
|
41-1448837
|
|
|
(State or other jurisdiction
of incorporation or organization)
|
(I.R.S. Employer Identification Number)
|
11568 Sorrento Valley Rd., Suite 11
San Diego, California 92121
(Address of principal executive offices, including zip code)
(858) 847-0200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registration was required to submit and post such files). YES x NO o
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 o
|
Accelerated filer o
|
|
Non-accelerated filer o
|
Smaller reporting company x
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO x
The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding on November 11, 2011 was 108,041,084.
FORM 10-Q
For the Quarterly Period Ended September 30, 2011
TABLE OF CONTENTS
|
PART I
|
FINANCIAL INFORMATION:
|
||
|
Item 1.
|
Financial Statements (Unaudited)
|
1
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
10
|
|
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
12
|
|
|
Item 4.
|
Controls and Procedures
|
13
|
|
|
PART II
|
OTHER INFORMATION
|
||
|
Item 1.
|
Legal Proceedings
|
13
|
|
|
Item 1A.
|
Risk Factors
|
13
|
|
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
13
|
|
|
Item 3.
|
Defaults Upon Senior Securities
|
13
|
|
|
Item 4.
|
(Removed and Reserved)
|
13
|
|
|
Item 5.
|
Other Information
|
13
|
|
|
Item 6.
|
Exhibits
|
13
|
|
|
SIGNATURES
|
15
|
||
Item 1. Financial Statements (Unaudited)
SpectraScience, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
September 30,
2011
|
December 31,
2010
|
|||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$
|
1,379,288
|
$
|
1,764,803
|
||||
|
Certificates of deposit
|
-
|
1,998,974
|
||||||
|
Inventories
|
616,731
|
491,133
|
||||||
|
Prepaid expenses and other current assets
|
25,495
|
69,384
|
||||||
|
Total current assets
|
2,021,514
|
4,324,294
|
||||||
|
Fixed assets, net
|
170,305
|
59,082
|
||||||
|
Patents, net
|
2,488,894
|
2,666,417
|
||||||
|
TOTAL ASSETS
|
$
|
4,680,713
|
$
|
7,049,793
|
||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable
|
$
|
504,228
|
$
|
205,266
|
||||
|
Accrued expenses
|
43,131
|
117,569
|
||||||
|
Total liabilities
|
547,359
|
322,835
|
||||||
|
COMMITMENTS
|
||||||||
|
SHAREHOLDERS’ EQUITY
|
||||||||
|
Series B Convertible Preferred Stock, $.01 par value:
|
||||||||
|
Authorized – 2,585,000 shares; shares issued and outstanding – 2,585,000 shares at September 30, 2011 and December 31, 2010, liquidation value of $517,000 and $517,000 plus accumulated and unpaid dividends of $105,198 and $106,931 as of September 30, 2011 and December 31, 2010, respectively
|
25,850
|
25,850
|
||||||
|
Series C Convertible Preferred Stock, $.01 par value:
|
||||||||
|
Authorized – 1,000,000 shares; shares issued and outstanding 1,000,000 shares at September 30, 2011 and December 31, 2010, $200,000 liquidation value
|
10,000
|
10,000
|
||||||
|
Common stock, $.01 par value:
|
||||||||
|
Authorized — 175,000,000 shares Issued and outstanding—108,041,084 and 107,994,529 shares at September 30, 2011 and December 31, 2010, respectively
|
1,080,411
|
1,079,945
|
||||||
|
Additional paid-in capital
|
30,792,798
|
30,380,879
|
||||||
|
Accumulated deficit
|
(27,775,705
|
)
|
(24,769,716
|
)
|
||||
|
TOTAL SHAREHOLDERS’ EQUITY
|
4,133,354
|
6,726,958
|
||||||
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
4,680,713
|
$
|
7,049,793
|
||||
Note: The balance sheet at December 31, 2010 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 financial statements.
- 1 -
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
Revenue
|
$ | - | $ | 3,150 | $ | - | $ | 22,400 | ||||||||
|
Cost of revenue
|
- | 1,694 | - | 5,443 | ||||||||||||
|
Gross profit
|
- | 1,456 | - | 16,957 | ||||||||||||
|
Operating expenses:
|
||||||||||||||||
|
Research and development
|
435,577 | 1,085,076 | 935,857 | 1,773,071 | ||||||||||||
|
General and administrative
|
601,251 | 516,535 | 1,662,749 | 1,509,448 | ||||||||||||
|
Sales and marketing
|
156,556 | 103,485 | 411,011 | 306,668 | ||||||||||||
|
Total operating expenses
|
1,193,384 | 1,705,096 | 3,009,617 | 3,589,187 | ||||||||||||
|
Operating (loss)
|
(1,193,384 | ) | (1,703,640 | ) | (3,009,617 | ) | (3,572,230 | ) | ||||||||
|
Other expense (income), net
|
(3,038 | ) | (1,882 | ) | (5,361 | ) | 431 | |||||||||
|
Net (Loss)
|
(1,190,346 | ) | (1,701,758 | ) | (3,004,256 | ) | (3,572,661 | ) | ||||||||
|
Deemed Dividend on Preferred Stock
|
- | - | - | (1,836,319 | ) | |||||||||||
|
Accumulated but unpaid dividend on preferred stock
|
- | - | - | (15,850 | ) | |||||||||||
|
Net (loss) applicable to common stockholders
|
$ | (1,190,346 | ) | (1,701,758 | ) | $ | (3,004,256 | ) | $ | (5,424,830 | ) | |||||
|
Basic and diluted net (loss) per share
|
$ | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.06 | ) | ||||
|
Weighted average common shares outstanding
|
108,041,084 | 95,326,605 | 108,033,806 | 87,345,937 | ||||||||||||
See accompanying notes to unaudited financial statements.
- 2 -
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the nine months ended September 30, 2011
(Unaudited)
|
Preferred Stock
|
Common Stock
|
Additional
Paid-In
|
Accumulated
|
Total
Shareholders’
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
||||||||||||||||||||||
|
Balance, December 31, 2010
|
3,585,000 | $ | 35,850 | 107,994,529 | $ | 1,079,945 | $ | 30,380,879 | $ | (24,769,716 | ) | $ | 6,726,958 | |||||||||||||||
|
Stock based compensation – consultants
|
54,144 | 54,144 | ||||||||||||||||||||||||||
|
Stock based compensation – employees
|
348,508 | 348,508 | ||||||||||||||||||||||||||
|
Common stock issued for services
|
42,222 | 422 | 7,578 | 8,000 | ||||||||||||||||||||||||
|
Accrued dividend paid in common stock
|
4,333 | 44 | 1,689 | (1,733 | ) | - | ||||||||||||||||||||||
|
Net loss
|
(3,004,256 | ) | (3,004,256 | ) | ||||||||||||||||||||||||
|
Balance, September 30, 2011
|
3,585,000 | $ | 35,850 | 108,041,084 | $ | 1,080,411 | $ | 30,792,798 | $ | (27,775,705 | ) | $ | 4,133,354 | |||||||||||||||
See accompanying notes to unaudited financial statements.
- 3 -
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
Nine Months Ended
September 30,
|
||||||||
|
2011
|
2010
|
|||||||
|
OPERATING ACTIVITIES:
|
||||||||
|
Net loss
|
$
|
(3,004,256
|
)
|
$
|
(3,572,661
|
)
|
||
|
Adjustments to reconcile net loss to cash used in operating activities:
|
||||||||
|
Depreciation and amortization
|
225,368
|
241,963
|
||||||
|
Stock-based compensation employees
|
348,508
|
196,445
|
||||||
|
Stock-based compensation consultants
|
54,144
|
15,282
|
||||||
|
Amortization of prepaid financing costs
|
12,364
|
114,658
|
||||||
|
Impairment of LUMA Equipment
|
-
|
1,025,373
|
||||||
|
Fair market value of common stock and warrants issued for services
|
8,000
|
113,000
|
||||||
|
Changes in operating assets and liabilities:
|
||||||||
|
Accounts receivable
|
-
|
30,771
|
||||||
|
Inventory
|
(125,598
|
)
|
(102,080
|
)
|
||||
|
Prepaid expenses and other assets
|
31,525
|
16,141
|
||||||
|
Accounts payable
|
298,962
|
(34,212
|
)
|
|||||
|
Accrued expenses
|
(74,438
|
)
|
(89,494
|
)
|
||||
|
Net cash (used in) operating activities
|
(2,225,421
|
)
|
(2,044,814
|
)
|
||||
|
INVESTING ACTIVITIES:
|
||||||||
|
Redemption of certificates of deposit
|
1,998,974
|
-
|
||||||
|
Purchases of fixed assets
|
(159,068
|
)
|
(3,315
|
)
|
||||
|
Net cash from (used in) investing activities
|
1,839,906
|
(3,315
|
)
|
|||||
|
FINANCING ACTIVITIES:
|
||||||||
|
Proceeds from issuance of Preferred Stock
|
-
|
2,699,736
|
||||||
|
Net cash provided by financing activities
|
-
|
2,699,736
|
||||||
|
Net increase (decrease) in cash and cash equivalents
|
(385,515
|
)
|
651,607
|
|||||
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
1,764,803
|
3,408,237
|
||||||
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
$
|
1,379,288
|
$
|
4,059,844
|
||||
See accompanying notes to unaudited financial statements.
- 4 -
Notes to Unaudited Condensed Financial Statements
September 30, 2011
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 (“LUMA”). Since 1996, the Company has primarily focused on developing the WavSTAT ® Optical Biopsy System (“WavSTAT System”).
The Company has developed and received U.S. Food and Drug Administration (“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 diagnosis and CE approved in the European Union for diagnosis of all types of cancer.
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 and which the Company plans to incorporate into future generations of its WavSTAT System.
Basis of Presentation
The accompanying unaudited 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 nine-month period ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. 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, 2010.
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 its cash receipts and cash disbursements also impact the Company’s cash flow. For the nine-month period ended September 30, 2011, the Company used approximately $2,225,000 in cash to fund operating activities. As of September 30, 2011, the Company had working capital of approximately $1,474,000 and a cash balance of approximately $1,379,000.
The Company expects to incur significant additional operating losses through at least the remainder of 2011, as it conducts clinical trials, introduces an improved version of its WavSTAT System, begins additional outcome-based clinical studies and increases sales and marketing efforts to commercialize the improved version of its 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.
- 5 -
2. Summary of Significant Accounting Policies
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 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. 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 financial statements. Significant estimates made by management include, among others, realization of long-lived assets, assumptions used to value stock options and warrants, 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. Intangible assets consist of patents, 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.
- 6 -
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 (the “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.
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 shareholders’ 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 September 30, 2011, the Company had one stock-based employee compensation plan under which it makes grants, the 2011 Equity Incentive Plan (the “EIP”). The EIP provides for the grant of incentive stock options (“ISOs”), nonqualified stock options (“NQSOs”) and restricted stock awards to full-time employees (who may also be directors) and NQSOs and restricted stock awards to non-employee directors, consultants, customers, vendors or providers of services. 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 2011 EIP is 5,000,000 shares of common stock. At September 30, 2011, the Company had outstanding 15,295,000 options under the EIP and the Company’s prior Amended 2001 Stock Plan representing approximately 14% of the Company’s outstanding shares (4,662,500 of which were exercisable), with 2,400,000 available for future issuance under the 2011 EIP. Awards under the Company’s EIP generally vest over four 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 nine months ended September 30, 2011 and 2010:
|
2011
|
2010
|
|||||||
|
Expected life
|
5 Years
|
5 Years
|
||||||
|
Risk-free interest rate
|
2.19 | % | 2.02 | % | ||||
|
Expected volatility
|
115 | % | 118 | % | ||||
|
Expected dividend yield
|
0 | % | 0 | % | ||||
In addition to the above, management estimated the forfeitures on employee options under the EIP 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.
- 7 -
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 rates 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
|
||||||||||||||||
|
December 31, 2010
|
1,504,179 | 14,695,000 | $ | 0.37 | 8.16 | - | ||||||||||||||
|
Options granted
|
(2,600,000 | ) | 2,600,000 | $ | 0.11 | 9.67 | ||||||||||||||
|
Options exercised
|
- | - | ||||||||||||||||||
|
Options forfeited
|
2,000,000 | (2,000,000 | ) | $ | 0.50 | 7.27 | ||||||||||||||
|
Options expired under 2001 EIP
|
(3,504,179 | ) | - | |||||||||||||||||
|
Additional options authorized
|
5,000,000 | - | ||||||||||||||||||
|
Outstanding at September 30, 2011
|
2,400,000 | 15,295,000 | $ | 0.22 | 8.31 | - | ||||||||||||||
|
Exercisable at September 30, 2011
|
4,662,500 | $ | 0.36 | 6.40 | - | |||||||||||||||
There were no options exercised during the nine months ended September 30, 2011 or 2010. At September 30, 2011, total unrecognized estimated employee compensation cost related to non-vested stock options granted prior to that date is approximately $919,000, which is expected to be recognized over the next three years.
Inventories
Inventories consisted of the following at September 30, 2011 and December 31, 2010:
|
September 30,
2011
|
December 31,
2010
|
|||||||
|
Raw materials
|
$
|
317,802
|
$
|
192,204
|
||||
|
Finished goods
|
298,929
|
298,929
|
||||||
|
Totals
|
$
|
616,731
|
$
|
491,133
|
||||
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period of computation. Diluted earnings (loss) per share is computed similarly to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and only if the additional common shares would be dilutive. Basic and diluted loss per share are the same for the three and nine month periods ended September 30, 2011 and 2010, 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 nine months ended September 30, 2011 include stock options to purchase 15,295,000 shares of common stock, warrants to purchase 26,733,498 shares of common stock and preferred stock convertible into 3,585,000 shares of common stock. If converted under the treasury method, these instruments would have resulted in no additional equivalent common shares outstanding.
- 8 -
3. Shareholders’ Equity
Common Stock
In January 2011, the Company issued 4,333 shares of Common Stock to a former holder of Series B Convertible Preferred Stock, pursuant to a dividend declaration on the Series B Convertible Preferred Stock. The fair value of the shares was determined to be approximately $1,733, based upon the value of the Common Stock on December 31, 2009, the date the dividends were determined.
In February 2011, the Company issued 42,222 shares of restricted Common Stock to Mark McWilliams, a director of the Company, in compensation for his service as interim Chief Executive Officer during October and November 2010. The Company recognized expense in the amount of $8,000, based upon the average market value of the stock during the October and November 2010 time period.
In February 2011, the Board approved the issuance of 348,392 shares of Common Stock for payment of accrued dividends related to the Company’s Series B Convertible Preferred Stock (the “Series B Preferred”). The Series B Preferred accumulated a dividend equal to $97,550 on December 31, 2010. 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.
Stock Options
In February 2011, the Board of Directors approved the EIP. In conjunction with this approval, the Board reserved 5,000,000 shares of Common Stock to underlie options available for issuance under the plan.
In February 2011, the Board approved the cancellation of certain stock options and the issuance of new stock options to directors of the Company. Previously issued stock options to purchase 2,000,000 shares of Common Stock at an average exercise price of $0.50 were cancelled and new stock options to purchase 2,600,000 at an exercise price of $0.11 were issued to directors of the Company. The application of current accounting standards resulted in the recognition of additional expense related to this transaction equal to the portion of the original awards’ grant date fair value for which the directors were expected to render requisite services for at the modification date, plus the excess of the fair value of the modified award immediately after the modification date over the fair value of the original award immediately before the modification date.
Warrants
On August 4, 2011, the Company entered into an Engagement Agreement (the “Agreement”) with Laidlaw & Company, LTD (“Laidlaw”). Under the Agreement, Laidlaw will provide the Company financial advisory, strategic financial planning and fundraising services. The terms of the Agreement provide for the issuance of five-year warrants to Laidlaw to purchase 1,485,838 shares of Common Stock at an exercise price of $0.08 per share. The warrants will be issued in four equal monthly issuances reflecting the right to purchase approximately 371,460 Common Shares for each issuance. During the three months ended September 30, 2011, the Company recognized noncash operating expense of approximately $44,000 related to this warrant issuance obligation.
4. Contingencies
In May 2011, the Company entered into an agreement with a supplier to construct a new design for the WavSTAT for approximately $805,000, subsequently modified to approximately $480,000. As of the date of this report, approximately $300,000 of this commitment has been expended.
5. Subsequent Events
None
- 9 -
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This quarterly report on Form 10-Q (the “Report”) contains forward-looking statements that are not related to historical results, including, without limitation, statements regarding our business strategy and objectives, near term operating goals, expectations regarding the market for our products and beliefs with respect to opportunities and industry conditions in those markets, beliefs about our products and expectations with respect to their performance and acceptance, regulatory goals and developments, future financial position, expectations with respect to future cash needs and the sufficiency of our working capital and expectations regarding operating losses for the remainder of the current fiscal year, and involve risks and uncertainties. Although we believe that the assumptions on which these forward-looking statements are based are reasonable, there can be no assurance that such assumptions will prove to be accurate and actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, changes in law or regulatory policies, unanticipated competition from other similar businesses, adverse outcomes from litigation, unexpected employee departures or disruptions, adverse market and general economic factors and other factors described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. Such forward-looking statements are qualified in their entirety by the cautions and risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Business
SpectraScience, Inc. (the “Company,” “SpectraScience,” “we,” “our,” or “us”) develops and manufactures innovative Laser Induced Fluorescence spectrophotometry systems capable of determining whether tissue is normal, pre-cancerous or cancerous without removing tissue from the body. The WavSTAT Optical Biopsy System (the “WavSTAT System”) is SpectraScience's first product to incorporate its proprietary Laser Induced Fluorescence technology for worldwide clinical use. The WavSTAT System is approved by the U.S. Food and Drug Administration (“FDA”) for use during endoscopy of the colon when screening for colon cancer. The Company’s second planned application of this technology for detecting pre-esophageal cancer is presently undergoing a clinical trial to determine its marketability. Upon successful completion of the trial, the Company plans to self-certify for CE mark approval for sale in the European Union and then file an application with the FDA seeking permission to begin marketing for that indication for use in the United States. The Company believes it has a strong intellectual property portfolio that will allow it to continue to expand its WavSTAT cancer diagnosis platform to address the diagnosis of multiple cancers, utilize additional proprietary bio-photonic techniques to improve the WavSTAT’s overall diagnostic performance and ultimately allow for the detection of cancer and pre-cancer over a relatively large area of examined tissue.
Our principal executive offices are located at 11568 Sorrento Valley Rd., Suite 11, San Diego, CA 92121. We can be reached by telephone at (858) 847-0200; by fax at (858) 847-0880; or by email at info@spectrascience.com. We have a Web site at http://www.spectrascience.com. The information contained on our Web site shall not be deemed to be a part of this Report.
Plan of Operation
The Company currently has FDA approval to market the WavSTAT System for diagnosing pre-cancerous and cancerous tissue in the colon and a CE mark for diagnosing cancer generally. Our plan over the next several months is to upgrade the WavSTAT System (such upgrade, the “WavSTAT 4 System”) to be more effective and easier to use in the diagnosis of pre-cancers and cancer of the colon. Concurrently, SpectraScience is attempting to form strategic partnerships with international endoscope or endoscope-related companies to whom we believe we can provide both competitive advantage and recurring revenue. In addition, we are evaluating the effectiveness of the WavSTAT System for use in detecting pre-cancer and cancer in the esophagus. Longer-term, the Company plans to explore the applicability of the WavSTAT System to diagnose different types of cancer to include, among others, bladder cancer, stomach cancer and lung cancer.
Over the next 12 months, SpectraScience intends to:
|
|
·
|
Roll-out the WavSTAT 4 System in international markets for the detection and treatment of pre-cancer and cancer of the colon.
|
|
|
·
|
Attempt to secure an international strategic distribution partner presently conducting business in the gastrointestinal endoscope market.
|
|
|
·
|
Complete WavSTAT System clinical trials related to the diagnosis of esophageal cancers.
|
|
|
·
|
Continue the design and planning for the next generation of our light-based systems to incorporate additional (“multi-modal”) non-invasive light-based technologies.
|
- 10 -
Three Months Ended September 30, 2011 and 2010
The Company recognized revenue of approximately $0 and $3,200 for the three months ended September 30, 2011 and 2010, respectively. The lack of revenue in the current three-month period is because of the Company’s focus on the introduction of the improved WavSTAT 4 System.
Total operating expenses decreased from approximately $1,705,000 to $1,194,000, a reduction of approximately $511,000 for the three-month period ended September 30, 2011 as compared to the three-month period ended September 30, 2010. This overall decrease was comprised of an approximate decrease in research and development expense of $649,000 offset by approximate increases of $84,000 in general and administrative expense and $54,000 in sales and marketing expense.
Research and development expenses decreased approximately $649,000 for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010. Overall research and development expenses for the comparative periods were approximately $436,000 and $1,085,000, respectively. The decline was primarily the result of an inventory impairment charge of approximately $819,000 taken in the three-month period ended September 30, 2010. In addition, the Company incurred approximate increases in engineering development expense of $192,000 and $20,000 in consulting expense, offset by approximate reductions of $37,000 in payroll expense and $5,000 in all other expense. The approximate $819,000 inventory impairment charge was a result of the Company abandoning its LUMA Cervical Imaging System to focus on developing its WavSTAT Optical Biopsy System in the three-month period ended September 30, 2011. The increase in engineering development expense is a result of the development of the next generation of the WavSTAT System, slated for introduction in the fourth quarter of 2011.
General and administrative expenses for the three months ended September 30, 2011 and 2010 were approximately $601,000 and $517,000, respectively. The approximate $84,000 increase for the three months ended September 30, 2011 compared to the three months ended September 30, 2010 was due to approximate increases in consulting expense of $98,000, travel expense of $45,000 and payroll expense of $18,000, offset by approximate decreases in amortization expense of $43,000, investor relations expense of $31,000 and other expense of $3,000. Consulting expense increased due to management’s decision to retain consultants rather than hire additional employees. Amortization expense declined as a result of a prior prepaid financing charge being fully amortized in January 2011.
Sales and marketing expenses for the three months ended September 30, 2011 and 2010 were approximately $157,000 and $103,000, respectively. The increase of approximately $54,000 was primarily due to approximate increases of $33,000 in advertising expense, $11,000 in professional expense, $9,000 in convention expense and $1,000 in other expense. These increases are generally a result of the Company beginning the process of the introduction of the WavSTAT 4 System into the European Union.
As a result of the above, the approximate net operating loss for the three months ended September 30, 2011 and 2010 was $1,194,000 and $1,702,000, respectively. Of the net operating loss for the quarter ended September 30, 2011, approximately $136,000 was comprised of non-cash stock-option expense.
Nine Months Ended September 30, 2011 and 2010
The Company recognized revenue of approximately $0 and $22,000 for the nine months ended September 30, 2011 and 2010, respectively. The lack of revenue in the current nine-month period is because of the Company’s focus on the introduction of the improved WavSTAT 4 System, planned for the fourth quarter of 2011.
For the nine-month period ended September 30, 2011 as compared to the nine-month period ended September 30, 2010, total operating expenses decreased approximately $579,000, from approximately $3,589,000 to $3,010,000. This overall decrease was comprised of an approximate decrease in research and development expense of $837,000, offset by approximate increases in general and administrative expense of $154,000 and sales and marketing expense of $104,000.
- 11 -
Overall research and development expenses for the nine months ended September 30, 2011 and 2010 were approximately $936,000 and $1,773,000, respectively. The approximate $837,000 decrease in research and development expense is a result of approximate decreases in inventory obsolescence expense of $1,024,000 and payroll expense of $159,000 offset by approximate increases of $244,000 in engineering development expense, $40,000 in consulting expense, $25,000 in travel expense, $17,000 in stock compensation expense, $14,000 in regulatory expense and $6,000 in other expense. The majority of the decrease resulted from a decrease in inventory obsolescence expense due to the Company’s write-down of LUMA assets in the prior period. In addition, the Company incurred increases in international travel expense and consulting expense due to increased international efforts and a shift to retaining contractors rather than hiring additional personnel.
General and administrative expenses for the nine months ended September 30, 2011 and 2010 were approximately $1,663,000 and $1,509,000, respectively. The approximate $154,000 increase for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 was due to approximate increases in stock compensation expense of $112,000, $180,000 in consulting expense, $48,000 in payroll expense and $70,000 in travel expense, offset by approximate decreases of $112,000 in amortization expense, $86,000 in investor relations expense, $31,000 in legal expense, $15,000 in rent expense and $12,000 in all other expenses. The increase in stock compensation expense was a result of the grant of additional stock options in early 2011. In addition, the Company incurred increases in international travel expense and consulting expense due to increased international efforts and a shift to retaining contractors rather than hiring additional personnel. The reductions in investor relations and legal expenses reflect a reduction in securities filings as compared to the prior period ago.
Sales and marketing expenses for the nine months ended September 30, 2011 and 2010 were approximately $411,000 and $307,000, respectively. This increase of approximately $104,000 was primarily due to approximate increases of $46,000 in professional expense, $111,000 in stock compensation expense, $33,000 in advertising expense, $14,000 in travel expense and $6,000 in other expense, offset by an approximate decrease of $106,000 in payroll expense. The Company incurred increases in international travel expense and consulting expense due to increased international efforts and a shift to retaining contractors rather than hiring additional personnel.
As a result of the above, the approximate net operating loss for the nine months ended September 30, 2011 and 2010 was $3,010,000 and $3,572,000, respectively. Of the net operating loss for the nine months ended September 30, 2011, approximately $410,000 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, general and administrative and sales and marketing activities. Fluctuations in our working capital due to timing differences of our cash receipts and cash disbursements also impact our cash flow. For the nine months ended September 30, 2011, the Company used approximately $2,225,000 in cash to fund operating activities. As of September 30, 2011, the Company had approximate working capital of $1,474,000 and a cash balance of approximately $1,379,000.
We expect to incur significant additional operating losses and to increase investments in inventory and tooling through at least December 31, 2011, as we complete clinical trials, begin outcome-based clinical studies and increase sales and marketing efforts to commercialize the WavSTAT4 System. If we do not receive sufficient funding, we 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 we receive additional funding, such proceeds may not be sufficient to allow us to sustain operations until we attain profitability and positive cash flows from operations.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Not required
- 12 -
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.
Changes in Internal Financial Controls
There was no change in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
|
PART II
|
OTHER INFORMATION
|
None
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
On August 4, 2011, the Company entered into an Engagement Agreement (the “Agreement”) with Laidlaw. Under the Agreement, Laidlaw will provide the Company financial advisory, strategic financial planning and fundraising services. The terms of the Agreement provide for the issuance of five-year warrants to Laidlaw to purchase 1,485,838 shares of Common Stock at an exercise price of $0.08 per share. The warrants will be issued in four equal monthly issuances reflecting the right to purchase approximately 371,460 Common Shares for each issuance. As of September 30, 2011, the Company was obligated to, but had not yet issued 742,920 warrants to Laidlaw pursuant to the Agreement. This transaction was deemed to be exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) of the Securities Act of 1933, as the transaction involved an issuance of our securities to a single party and did not involve any public offering.
None
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
- 13 -
|
32.2
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
101*
|
Financial statements from the quarterly report on Form 10-Q of the Company for the quarter ended September 30, 2011, formatted in XBRL; (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements tagged as blocks of text.
|
- 14 -
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
SpectraScience, Inc.
(Registrant)
|
||
|
Date: November 14, 2011
|
/s/ Michael P. Oliver
|
|
|
Michael P. Oliver
|
||
|
President and Chief Executive Officer
|
||
|
(Principal executive officer)
|
||
|
Date: November 14, 2011
|
/s/ James Dorst
|
|
|
|
James Dorst
|
|
|
Chief Financial Officer and Chief Operating Officer
|
||
|
(Principal financial officer and principal accounting
officer)
|
||
- 15 -