Attached files
| file | filename |
|---|---|
| EX-31.1 - SPECTRASCIENCE INC | v222716_ex31-1.htm |
| EX-32.1 - SPECTRASCIENCE INC | v222716_ex32-1.htm |
| EX-32.2 - SPECTRASCIENCE INC | v222716_ex32-2.htm |
| EX-31.2 - SPECTRASCIENCE INC | v222716_ex31-2.htm |
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 March 31, 2011
Commission file number 0-13092
SPECTRASCIENCE, INC.
(Exact name of registrant
as specified in its charter)
|
Minnesota
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41-1448837
|
|
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer Identification Number)
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11568 Sorrento Valley Rd., Suite 11
San Diego, California 92121
(Address of principal executive offices)
(858) 847-0200
(Registrant's telephone number)
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 o 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.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company x
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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 May 12, 2011 was 108,041,084.
SPECTRASCIENCE, INC.
FORM 10-Q
For the Quarterly Period Ending March 31, 2011
TABLE OF CONTENTS
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PART I
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FINANCIAL INFORMATION:
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||||
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Item 1.
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Financial Statements (Unaudited)
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1
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|||
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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9
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|||
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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11
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|||
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Item 4.
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Controls and Procedures
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11
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|||
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PART II
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OTHER INFORMATION
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||||
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Item 1.
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Legal Proceedings
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12
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|||
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Item 1A.
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Risk Factors
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12
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|||
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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12
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|||
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Item 3.
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Defaults Upon Senior Securities
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12
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|||
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Item 4.
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(Removed and Reserved)
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12
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|||
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Item 5.
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Other Information
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12
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|||
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Item 6.
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Exhibits
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12
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|||
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SIGNATURES
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13
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||||
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited)
SpectraScience, Inc. and Subsidiary
Consolidated Balance Sheets
(Unaudited)
|
March 31,
2011
|
December 31,
2010
|
|||||||
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ASSETS
|
||||||||
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Current assets:
|
||||||||
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Cash and cash equivalents
|
$
|
3,187,631
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$
|
1,764,803
|
||||
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Certificates of deposit
|
-
|
1,998,974
|
||||||
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Inventories
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485,882
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491,133
|
||||||
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Prepaid expenses and other current assets
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20,404
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69,384
|
||||||
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Total current assets
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3,693,917
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4,324,294
|
||||||
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Fixed assets, net
|
41,506
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59,082
|
||||||
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Patents, net
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2,604,025
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2,666,417
|
||||||
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TOTAL ASSETS
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$
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6,339,448
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$
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7,049,793
|
||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
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Current liabilities:
|
||||||||
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Accounts payable
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$
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248,227
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$
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205,266
|
||||
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Accrued expenses
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39,283
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117,569
|
||||||
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Total liabilities
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287,510
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322,835
|
||||||
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COMMITMENTS
|
||||||||
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SHAREHOLDERS’ EQUITY
|
||||||||
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Series B Convertible Preferred Stock, $.01 par value:
|
||||||||
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Authorized – 2,585,000 shares; shares issued and outstanding – 2,585,000 shares at March 31, 2011 and December 31, 2010, liquidation value of $517,000 and $517,000 plus accumulated and unpaid dividends of $97,550 and $99,283 as of March 31, 2011 and December 31, 2010, respectively
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25,850
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25,850
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||||||
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Series C Convertible Preferred Stock, $.01 par value:
|
||||||||
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Authorized – 1,000,000 shares; shares issued and outstanding 1,000,000 shares at March 31, 2011 and December 31, 2010, $200,000 liquidation value
|
10,000
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10,000
|
||||||
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Common stock, $.01 par value:
|
||||||||
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Authorized — 175,000,000 shares
|
||||||||
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1,080,411
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1,079,945
|
|||||||
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Additional paid-in capital
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30,561,971
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30,380,879
|
||||||
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Accumulated deficit
|
(25,626,294
|
)
|
(24,769,716
|
)
|
||||
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TOTAL SHAREHOLDERS’ EQUITY
|
6,051,938
|
6,726,958
|
||||||
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
6,339,448
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$
|
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 -
SpectraScience, Inc. and Subsidiary
STATEMENTS OF OPERATIONS
(Unaudited)
|
Three Months Ended March 31,
|
||||||||
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2011
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2010
|
|||||||
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Revenue
|
$
|
-
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$
|
11,150
|
||||
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Cost of revenue
|
-
|
2,479
|
||||||
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Gross profit
|
-
|
8,671
|
||||||
|
Operating expenses:
|
||||||||
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Research and development
|
211,679
|
224,392
|
||||||
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General and administrative
|
547,110
|
511,287
|
||||||
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Sales and marketing
|
95,899
|
92,104
|
||||||
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Total operating expenses
|
854,688
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827,783
|
||||||
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Operating loss
|
(854,688
|
)
|
(819,112
|
)
|
||||
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Other income (expense), net
|
(157
|
)
|
(1,206
|
)
|
||||
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Net loss
|
(854,845
|
)
|
(820,318
|
)
|
||||
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Accumulated but unpaid dividend on preferred stock
|
-
|
(81,319
|
)
|
|||||
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Net loss applicable to common shareholders
|
$
|
(854,845
|
)
|
$
|
(901,637
|
)
|
||
|
Basic and diluted net loss per share
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
||
|
Weighted average common shares outstanding
|
108,019,251
|
74,805,948
|
||||||
See accompanying notes to unaudited financial statements.
- 2 -
SpectraScience, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the three months ended March 31, 2011
(Unaudited)
|
Preferred Stock
|
Common Stock
|
Additional
Paid-In
|
Accumulated
|
Total
Shareholders’
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
||||||||||||||||||||||
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Balance, December 31, 2010
|
3,585,000 | $ | 35,850 | 107,994,529 | $ | 1,079,945 | $ | 30,380,879 | $ | (24,769,716 | ) | $ | 6,726,958 | |||||||||||||||
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Stock based compensation – consultants
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6,051 | 6,051 | ||||||||||||||||||||||||||
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Stock based compensation – employees
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165,774 | 165,774 | ||||||||||||||||||||||||||
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Common stock issued for services
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42,222 | 422 | 7,578 | 8,000 | ||||||||||||||||||||||||
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Accrued dividend paid in common stock
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4,333 | 44 | 1,689 | (1,733 | ) | - | ||||||||||||||||||||||
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Net loss
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(854,845 | ) | (854,845 | ) | ||||||||||||||||||||||||
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Balance, March 31, 2011
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3,585,000 | $ | 35,850 | 108,041,084 | $ | 1,080,411 | $ | 30,561,971 | $ | (25,626,294 | ) | $ | 6,051,938 | |||||||||||||||
See accompanying notes to unaudited financial statements.
- 3 -
SpectraScience, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
Three Months Ended March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
OPERATING ACTIVITIES:
|
||||||||
|
Net loss
|
$
|
(854,845
|
)
|
$
|
(820,318
|
)
|
||
|
Adjustments to reconcile net loss to cash used in operating activities:
|
||||||||
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Depreciation and amortization
|
79,968
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83,878
|
||||||
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Stock-based compensation employees
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165,774
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38,180
|
||||||
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Stock-based compensation consultants
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6,051
|
11,369
|
||||||
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Amortization of prepaid financing costs
|
12,364
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38,219
|
||||||
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Fair market value of common stock issued for services
|
8,000
|
39,900
|
||||||
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Changes in operating assets and liabilities:
|
||||||||
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Accounts receivable
|
-
|
16,603
|
||||||
|
Inventory
|
5,251
|
(16,658
|
)
|
|||||
|
Prepaid expenses and other assets
|
36,616
|
11,976
|
||||||
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Accounts payable
|
42,961
|
(37,132
|
)
|
|||||
|
Accrued expenses
|
(78,286
|
)
|
(96,918
|
)
|
||||
|
Net cash (used in) operating activities
|
(576,146
|
)
|
(730,901
|
)
|
||||
|
INVESTING ACTIVITIES:
|
||||||||
|
Redemption of certificates of deposit
|
1,998,974
|
-
|
||||||
|
Net increase (decrease) in cash and cash equivalents
|
1,422,828
|
(730,901
|
)
|
|||||
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
1,764,803
|
3,408,237
|
||||||
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
$
|
3,187,631
|
$
|
2,677,336
|
||||
See accompanying notes to unaudited financial statements.
- 4 -
Notes to Unaudited Condensed Financial Statements
March 31, 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 detection.
LUMA has 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. LUMA received FDA approval as an adjunct to colposcopy in March 2006.
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 three-month period ended March 31, 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 three-month period ending March 31, 2011, the Company used $576,146 in cash to fund operating activities. As of March 31, 2011, the Company had working capital of $3,406,407 and a cash balance of $3,187,631.
The Company expects to incur significant additional operating losses through at least the remainder of 2011, 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.
- 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 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. 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.
- 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 March 31, 2011, the Company had one stock-based employee compensation plan, the Spectra Science, Inc. 2011 Equity Incentive Plan (the “EIP”). The EIP provides for the grant of incentive stock options (“ISOs”), nonqualified stock options (“NQSOs”), restricted stock awards, restricted stock unit awards, stock appreciation rights, and performance awards to full-time employees (who may also be directors) to non-employee directors, consultants, advisors 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 March 31, 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 (3,366,667 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 three months ended March 31, 2011 and 2010:
|
2011
|
2010
|
|||||
|
Expected life
|
5 Years
|
-
|
||||
|
Risk-free interest rate
|
2.19%
|
-
|
||||
|
Expected volatility
|
115%
|
-
|
||||
|
Expected dividend yield
|
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.
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.
- 7 -
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
|
||||||||||||||||
|
December 31, 2010
|
1,504,179 | 14,695,000 | $ | 0.37 | 8.66 | |||||||||||||||
|
Options granted
|
(2,600,000 | ) | 2,600,000 | $ | 0.11 | 9.92 | ||||||||||||||
|
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 March 31, 2011
|
2,400,000 | 15,295,000 | $ | 0.20 | 8.82 | |||||||||||||||
|
Exercisable at March 31, 2011
|
3,366,667 | $ | 0.47 | 7.88 | ||||||||||||||||
There were no options exercised during the three months ended March 31, 2011 or 2010. At March 31, 2011, total unrecognized estimated employee compensation cost related to non-vested stock options granted prior to that date is approximately $1,098,000, which is expected to be recognized over the next three years.
Inventories
Inventories consisted of the following at March 31, 2011 and December 31, 2010:
|
March 31,
2011
|
December 31,
2010
|
|||||||
|
Raw materials
|
$
|
186,953
|
$
|
192,204
|
||||
|
Finished goods
|
298,929
|
298,929
|
||||||
|
Totals
|
485,882
|
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 months ended March 31, 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 three months ended March 31, 2011 include stock options to purchase 15,295,000 shares of common stock, warrants to purchase 25,247,660 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 EIP.
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.
4. Subsequent Events
Subsequent events have been evaluated through the date financial statements are filed with the Securities and Exchange Commission.
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, including expansion of existing facilities, 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.
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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 fully developed product to incorporate its proprietary Laser Induced Fluorescence technology for worldwide clinical use. It 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 application of this technology for detecting pre-esophageal cancer is undergoing a clinical trial at four institutions. Upon completion of the trial, the Company plans to file an application with the FDA seeking permission to begin marketing for that indication for use. SpectraScience believes its core technology is a hardware platform technology that can be developed for use in many areas of the human body such as early detection of pre-cancers in the lung.
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 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. Our plan is to add another indication for use in detecting pre-cancer and cancer in the esophagus. Over the next 12 months, SpectraScience intends to:
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Continue selling the WavSTAT System in the international and U.S. for the detection and treatment of pre-cancer and cancer of the colon.
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Complete WavSTAT System clinical trials related to the diagnosis of esophageal cancers.
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Continue the design and planning for the next generation of our fluorescence-based systems.
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Results of Operations
Three Months ended March 31, 2011 and 2010
The Company recognized revenue of approximately $0 and $11,150 for the three months ended March 31, 2011 and 2010, respectively. The absence of revenue in the most recent quarter is reflective of the Company’s refocus on establishing a strategic international distribution partner.
Overall research and development expenses for the three months ended March 31, 2011 and 2010 were approximately $212,000 and $224,000, respectively. The approximate $12,000 decrease in research and development expenses is a result of approximate decreases in payroll expense of $78,000, offset by approximate increases in $25,000 in stock compensation expense, $20,000 in consulting expense, $9,000 in engineering development expense, $6,000 in regulatory expense and $6,000 in all other research expenses. Payroll decreased as the Company reduced employee salaries and headcount. Stock compensation expense increased as a result of remaining employees receiving new stock option grants in December of 2010. All other research and development expenses increased due to current initiatives to improve the usability of the WavSTAT System machine and to lower the production cost of our single-use forceps.
General and administrative expenses for the three months ended March 31, 2011 and 2010 were approximately $547,000 and $511,000, respectively. The approximate $36,000 increase for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 was due to approximate increases in consulting expense of $60,000, stock compensation expense of $88,000, payroll expense of $15,000 and travel expense of $7,000 offset by approximate decreases in investor relations expense of $49,000, financial amortization of $26,000, accounting expense of $22,000, rent expense of $15,000, legal expense of $9,000 and other expense of $13,000. Consulting expense increased due to the Company’s efforts to utilize outside services to evaluate our intellectual property position and assess our competitive environment. Stock compensation expense increased as a result of remaining employees receiving new stock option grants in December of 2010. Payroll expense increased due to our hiring of a new Chief Executive Officer while travel expense increased due to efforts required to establish appropriate partnerships, both for potential distribution and additional technology. Investor relations expense decreased due to the Company eliminating investor relations contractors pending review of overall strategy and market approach. All other expenses declined as a result of overall cost reduction efforts.
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Sales and marketing expenses for the three months ended March 31, 2011 and 2010 were approximately $96,000 and $92,000, respectively. The increase of approximately $4,000 was primarily due to approximate increases of $11,000 in stock compensation expense and $9,000 in sales consulting expense offset by approximate decreases in all other sales related expenses of $16,000. Stock compensation expense increased as a result of remaining employees receiving new stock option grants in December of 2010. Increases in sales consulting were a result of the Company’s utilization of consultants to begin the process of marketing to certain domestic managed care organizations. All other expenses declined as a result of overall cost reduction efforts.
As a result of the above, the approximate net loss for the three months ended March 31, 2011 and 2010 was $855,000 and $820,000, respectively. Of the net loss for the quarter ended March 31, 2011, approximately $172,000 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 three months ended March 31, 2011, the Company used $576,146 in cash to fund operating activities. As of March 31, 2011, the Company had working capital of $3,406,407 and a cash balance of $3,187,631.
We expect to incur significant additional operating losses 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 WavSTAT Systems. 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
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.
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PART II
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OTHER INFORMATION
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Legal Proceedings
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None
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Risk Factors
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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.
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Unregistered Sales of Equity Securities and Use of Proceeds
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None
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Defaults Upon Senior Securities
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None
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(Removed and Reserved)
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Other Information
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Exhibits
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10.1*
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SpectraScience, Inc. 2011 Equity Incentive Plan (incorporated by reference to the same numbered exhibit in the registrant’s current report on Form 8-K, filed March 1, 2011)
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10.2*
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Form of Non-qualified Stock Option Award Agreement (incorporated by reference to the same numbered exhibit in the registrant’s current report on Form 8-K, filed March 1, 2011)
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2
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Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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SpectraScience, Inc.
(Registrant)
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Date: May 16, 2011
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/s/ Michael P. Oliver
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Michael P. Oliver
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President and Chief Executive Officer
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(Principal executive officer)
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Date: May 16, 2011
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/s/ James Dorst
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James Dorst
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Chief Financial Officer and Chief Operating Officer
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(Principal financial officer and principal accounting officer)
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