Q3 2011 Results
Brian Marckx, CFA
SpectraScience, Inc. (SCIE.PK) filed their 10-Q for the third quarter ending September 30, 2011 on November 14th. As expected, the company did not generate any revenue. Operating expenses were $1.19 million, slightly above our $973k estimate – the difference mostly confined to G&A expense but overall the variance is relatively insignificant. EPS came in at ($0.01), in-line with our estimate.
SpectraScience exited the quarter with $1.38 million in cash and equivalents, compared to $2.58 million at 6/30/2011. Cash used in operations was $1.04 million and $2.23 million in the three and nine months ending 9/30/2011. As we noted in our initiation report on SCIE (10/20/2011), we expect the cash burn rate to significantly increase in the near-term as SpectraScience ramps up production, manufacturing and related activities in preparation for the European launch of WavSTAT4. As a result, the company will need to secure additional capital in the very near future – which we discuss below
We have made some very minor adjustments to our model following Q3 results and the company’s business update call. Our Outlook, Outperform investment recommendation and $0.40 price target all remain unchanged.
Business Update Call
Management held a business update conference call on November 10th, providing information on feedback from the introduction of WavSTAT4 at UEGW in October, their discussions surrounding distribution partners, the status of the commercial launch of WavSTAT4, ongoing R&D efforts, and their plans relative to near-term financing.
- UEGW: Management introduced WavSTAT4 at the 19th annual United European Gastroenterology Week in Stockholm, Sweden which was held during the fourth week of October. SpectraScience indicated they received a very positive response and noted that over 100 visitors, including 20 distributors, visited their booth. WavSTAT4 was also mentioned by two separate speakers at a sponsored dinner which helped drive further interest. The company expects to leverage the response from their attendance at UEGW and is currently in the process of following up on several leads – including with physicians and distributors.
- Distribution: The company continues to have ongoing discussions with the large, primary distributor that has shown at least some level of interest in WavSTAT4. Management noted on the call that this distributor has indicated they would like to see physician interest and some sales traction before they move closer towards committing to a distribution partnership with SpectraScience. However, the implication is that there is not necessarily definitive metrics that the distributor dictated that SpectraScience meets or a timeline on if or when the distributor may move the process along. In the meantime, management will look to bring on smaller distribution partners to facilitate the initial roll-out of WavSTAT4 in Europe. SpectraScience believes they could have one or two distribution deals in place within the next few months. Management also noted that they have received inquiries from distributors in Australia and Russia – which they expect to investigate further.
- WavSTAT4 Status: The enhancements to WavSTAT4 were completed prior to introduction at UEGW. Before the system can be launched commercially it will have to complete testing showing that it meets certain International Electrotechnical Commission (IEC) standards – this should be a relatively simple hurdle to clear and should be completed by the end of November. SpectraScience expects to have WavSTAT4 commercially available for sale in Europe by sometime in December. The strategy relative to the U.S. market remains unchanged – SpectraScience expects to initiate the process for a supplement to the original PMA during Q1 2012 – and if all goes well, WavSTAT4 could be in the U.S. market sometime in 2014.
- R&D: Data collection from WavSTAT studies (one in colon cancer and one in esophageal cancer) continues. Results of the studies could be available for presentation at Digestive Disease Week in San Diego in May 2012, which could help spark further interest in WavSTAT4.
- Financing: Jim Dorst, SpectraScience’s CFO, was on the call. Jim mentioned that they are considering a few options relative to near-term financing and indicated that their plan may involve a short-term bridge-type financing (i.e. – loan) for ~ $1MM – $1.5MM (within the next few months), followed by an additional $4.5MM – $5MM – which management hopes to have in place by mid-2012 and would potentially come from the sale of equity or debt.
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